Accounting Conservatism and the Cost of Capital: An International Analysis
The Wharton School - Department of Accounting; Temple University - Fox School of Business and Management
February 7, 2014
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, G38working papers series
Date posted: September 13, 2008 ; Last revised: April 21, 2014
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