Conditional Conservatism and the Cost of Equity Capital: Information Precision and Information Asymmetry Effects

Vol 2, No. 1 (2016) Applied Finance and Accounting

24 Pages Posted: 1 Jun 2014 Last revised: 9 Apr 2017

See all articles by Gary C. Biddle

Gary C. Biddle

University of Melbourne - Faculty of Business and Economics; Columbia Business School; HKU Business School; London Business School

Mary L. Z. Ma

York University

Feng Wu

University of Macau - Faculty of Business Administration

Date Written: November 21, 2015

Abstract

Prior studies report negative or insignificant relations between conditional conservatism and the cost of equity capital, arguing that conservatism reduces information risk. Using accounting-based conditional conservatism proxies, however, we find a significantly positive association between conditional conservatism and the cost of equity. This positive relation operates via improving information precision about negative earnings shocks and generally inflating information asymmetry among investors, both of which increase the cost of equity. We further find that the cost of equity effect of conditional conservatism disappears in the period after the enactment of the Sarbanes-Oxley Act (SOX), consistent with the notion that nationwide improvement of information precision about negative news and diminished information asymmetry are engendered by the SOX regulation. This study adds to researches on conditional conservatism, SOX, and the cost of equity, and also has policy implications.

Keywords: conditional conservatism; cost of equity capital; asset pricing test; Sarbanes-Oxley Act (SOX)

JEL Classification: M41; G32; G12; G14

Suggested Citation

Biddle, Gary C. and Ma, Mary L. Z. and Wu, Feng, Conditional Conservatism and the Cost of Equity Capital: Information Precision and Information Asymmetry Effects (November 21, 2015). Vol 2, No. 1 (2016) Applied Finance and Accounting, Available at SSRN: https://ssrn.com/abstract=2444023 or http://dx.doi.org/10.2139/ssrn.2444023

Gary C. Biddle

University of Melbourne - Faculty of Business and Economics ( email )

Level 8, 198 Berkeley Street
Carlton, VIC 3010
Melbourne, Victoria 3010
Australia
61-3-8344-9807 (Phone)
61-3-9349-2397 (Fax)

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

HKU Business School ( email )

00000
Hong Kong

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Mary L. Z. Ma (Contact Author)

York University ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Feng Wu

University of Macau - Faculty of Business Administration ( email )

Av. Padre Tomas Pereira
Macau
Macau

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
86
Abstract Views
546
rank
316,023
PlumX Metrics