Abstract

http://ssrn.com/abstract=2103776
 
 

References (44)



 
 

Citations (3)



 


 



Conservatism and Aggregation: The Effect on Cost of Equity Capital and the Efficiency of Debt Contracts


Anne Beyer


Stanford University - Graduate School of Business

November 1, 2013

Rock Center for Corporate Governance at Stanford University Working Paper No. 120

Abstract:     
This paper studies the joint effect of conservatism and aggregation on the cost of equity capital and the efficiency of debt contracts. In the model, a firm's two assets are valued at either the lower-of-cost-or-market or fair value and the accounting report aggregates the value of the two assets. While the process of aggregation leads inevitably to a loss of information, what information is lost depends on the accounting regime. In the conservative regime, gains are ignored while in the fair value regime gains are off-set against losses.

The paper studies the joint effect of conservatism and aggregation in two settings. First, it considers an all-equity firm and compares the valuation of equity when investors observe an accounting report under either the conservative or the fair-value regime. The model predicts that cost of equity capital is lower in the conservative regime than in the fair value regime if the firm's production function exhibits sufficiently decreasing marginal returns. Second, the paper takes a contractual perspective and considers the effiiciency of debt contracts when debt covenants must be written in terms of the accounting report. The paper shows the maximum capital that can be raised by a debt contract which implements efficient post-contractual decisions is higher in the conservative than in the fair value regime.

Number of Pages in PDF File: 53

Keywords: Financial reporting, Cost of capital, Debt contracts, Conservatism

JEL Classification: M41, N20, D80

working papers series


Download This Paper

Date posted: July 12, 2012 ; Last revised: June 5, 2014

Suggested Citation

Beyer, Anne, Conservatism and Aggregation: The Effect on Cost of Equity Capital and the Efficiency of Debt Contracts (November 1, 2013). Rock Center for Corporate Governance at Stanford University Working Paper No. 120. Available at SSRN: http://ssrn.com/abstract=2103776 or http://dx.doi.org/10.2139/ssrn.2103776

Contact Information

Anne Beyer (Contact Author)
Stanford University - Graduate School of Business ( email )
518 Memorial Way
Stanford, CA 94305-5015
United States

Feedback to SSRN


Paper statistics
Abstract Views: 789
Downloads: 227
Download Rank: 76,666
References:  44
Citations:  3

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo3 in 0.954 seconds