Accounting Conservatism and the Cost of Capital: An International Analysis
The Wharton School - Department of Accounting; Temple University - Fox School of Business and Management
April 13, 2015
This paper examines the role of conditional accounting conservatism in mitigating the cost of equity and debt capital in an international setting. I find that firms domiciled in countries with more conservative financial reporting systems have lower cost of equity and debt capital. I further explore the cross-sectional variation of the above relations. I find that the negative association between conditional conservatism and the cost of equity and debt capital is more pronounced in countries with stronger legal enforcement, suggesting a complementary role between conservatism and legal institutions in capital markets. I also find that conservatism only reduces the cost of debt in countries where accounting-based covenants are widely used, consistent with the argument that conditional conservatism improves the efficiency of debt contracts via accelerating covenant violations.
Number of Pages in PDF File: 43
Keywords: Cost of debt, Cost of equity, Conditional conservatism, Legal enforcement
JEL Classification: M41, M44, M47, G12, F00, G32, G38
Date posted: September 13, 2008 ; Last revised: April 14, 2015
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