Accounting Conservatism and Cost of Capital: An International Analysis

Abstract:     
This paper examines the contracting benefits of accounting conservatism on international capital markets. I find that firms domiciled in countries with more conservative financial reporting systems have lower cost of equity and debt capital. I further examine how the interaction between conservatism and country corporate governance structures influences the cost of capital. Consistent with the information role of conservatism, I find that the negative association between conservatism and the cost of capital is stronger for countries with poorer information environment. I also document a substitution effect between the strength of shareholder protection and conservative financial reporting and a complementary effect between the strength of creditor protection and conservatism.

Number of Pages in PDF File: 50

Keywords: Cost of debt, Cost of equity, Conservatism, Corporate Governance

JEL Classification: M41, M44, M47, G12, F00, G32, G38

working papers series