The Effect of Conditional Conservatism on Cost of Debt and Mediation Role of CSR Disclosure: Empirical Evidences from IDX
16 Pages Posted: 5 Dec 2016
Date Written: September 30, 2016
A number of previous studies have found evidences that corporate social responsibility disclosure (CSRD) are positively related corporate sustainable performance. These result indicate that socially responsible firms have good management system, more transparent, good reputation that will impact to financial outcomes. Other significant findings regarding CSR initiatives shown that CSR reporting has positive market consequences, where social responsible firms is likely to have ease of access to financing. A number of studies have been conducted with consistent result to consensus that the higher level of CSRD, the lower cost of equity capital. However very limited studies have been conducted to study relation of CSRD and cost of debt. Further studies about this topic are important because debt financing play an important role as external financing to enhance firms’ growth. Characteristics of debt market which is less risky and less volatile than equity market, attract wider coverage of firms to implement CSR practices. Under contracting theory, the banks as dominant lenders require borrowers to adopt accounting conservatism principle in their debt covenant. Accounting conservatism is a mean of constraining moral hazard caused by parties of the firms having asymmetric information, asymmetric pay-off. Especially in the debt contract the existence of conservatism as stringent standard in revenue recognition largely derived from the need to protect the lenders. Scholars argue CSRD that are prepared under spirit of conservatism could be perceived to give information to predict borrowers’ risk. This study aimed to find evidences how CSRD could effect in lower COD. This research is questioning “Do banks give value on CSRD on their lending decision?” This study argue that quality of CSRD should be determined by level adoption of accounting conservatism adopted in firms accounting system. This research proposes to examine direct effect of conditional conservatism (CONSV) on COD, and the indirect effect of CONSV on COD through mediation role of CSRD. In addition we propose to examine three links: 1) Whether CONSV have negative effect on COD, 2) Whether CONSV have positif effect on CSRD, and 3) Whether CSRD have negative effect on COD. This study using sample manufacturing firms listed at Indonesia Stock Exchange (IDX) period 2011-2014. This research consider CSRD as endogenous variable that is predicted to have mediation role on the relation of CONSV and COD. Result of endogeneity test showed CONSV and audit committee mechanism (ACM) are instrument variables for CSRD. Furthermore we use ordinary least square (OLS) to examine link 1 and 2, and two stages least square (TSLS) for link 3. The result show that: 1) CONSV have no significant effect on COD directly, 2) CONSV have no significant effect on CSRD, while ACM have positive effect on CSRD, 3) CSRD have significant mediation role, where endogeneity variable CSRFITT have negative effect on COD. Result of examination led to conclusion that banks gave value to CSR disclosure in their lending decision. CSR disclosure is perceived to give additional information for bank in assessing borrowers’ risk, when there are no adequate conservatism level. CSRD could be perceived as representation of good management and good governance of the firm that can give assurance in bank lending decision.
Keywords: Audit committee mechanism, Borrowers’ risk, Conditional conservatism, CSR disclosure, Cost of debt, Estimation risk
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