Abstract

http://ssrn.com/abstract=1261971
 
 

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Accounting Conservatism and the Cost of Capital: An International Analysis


Xi Li


The Wharton School - Department of Accounting; Temple University - Fox School of Business and Management

February 7, 2014


Abstract:     
This paper examines the governance and contracting role of conditional 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 is stronger in countries with lower board independence and weaker anti-director rights, suggesting a substitution effect between the governance role of conditional conservatism and a country’s shareholder monitoring structure. On the other hand, I find the negative association between conditional conservatism and the cost of debt is stronger in countries with stronger creditor rights, suggesting a complementary effect between the contracting role of conditional conservatism and creditor protection. I also find that conditional 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 accelerated violation of accounting-based covenants.

Number of Pages in PDF File: 49

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

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

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Date posted: September 13, 2008 ; Last revised: April 21, 2014

Suggested Citation

Li, Xi, Accounting Conservatism and the Cost of Capital: An International Analysis (February 7, 2014). Available at SSRN: http://ssrn.com/abstract=1261971 or http://dx.doi.org/10.2139/ssrn.1261971

Contact Information

Xi Li (Contact Author)
The Wharton School - Department of Accounting ( email )
1314 Steinberg-Dietrich Hall
3641 Locust Walk
Philadelphia, PA 19104-6365
United States
(215) 898-7125 (Phone)

Temple University - Fox School of Business and Management ( email )
Alter Hall 449
1801 Liacouras Walk
Philadelphia, PA 19122
United States
HOME PAGE: http://astro.temple.edu/~xili/

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