Conservatism, disclosure and the cost of equity capital

Tracy C Artiach and Peter M Clarkson
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Tracy C Artiach: School of Accountancy, QUT Business School, Queensland University of Technology, Brisbane, QLD, Australia
Peter M Clarkson: UQ Business School, The University of Queensland, Brisbane, QLD, Australia; Beedie School of Business, Simon Fraser University, Burnaby, BC, Canada

Australian Journal of Management, 2014, vol. 39, issue 2, 293-314

Abstract: This study seeks insights into the economic consequences of accounting conservatism by examining the relation between conservatism and cost of equity capital. Appealing to the analytical and empirical literatures, we posit an inverse relation. Importantly, we also posit that the strength of the relation is conditional on the firm’s information environment, being the strongest for firms with high information asymmetry and the weakest (potentially negligible) for firms with low information asymmetry. Based on a sample of US-listed entities, we find, as predicted, an inverse relation between conservatism and the cost of equity capital, but further, that this relation is diminished for firms with low information asymmetry environments. This evidence indicates that there are economic benefits associated with the adoption of conservative reporting practices and leads us to conclude that conservatism has a positive role in accounting principles and practices, despite its increasing rejection by accounting standard setters.

Keywords: Conservatism; cost of equity capital; disclosure; information risk; signalling (search for similar items in EconPapers)
JEL-codes: M41 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:39:y:2014:i:2:p:293-314

DOI: 10.1177/0312896213481367

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