Conservatism, disclosure and the cost of equity capital

Artiach, Tracy & Clarkson, Peter (2013) Conservatism, disclosure and the cost of equity capital. Australian Journal of Management.

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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.

Impact and interest:

3 citations in Scopus
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3 citations in Web of Science®

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268 since deposited on 07 Jun 2013
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ID Code: 60661
Item Type: Journal Article
Refereed: Yes
Keywords: Conservatism, cost of equity capital, disclosure, information risk, signalling
DOI: 10.1177/0312896213481367
ISSN: 0312-8962
Subjects: Australian and New Zealand Standard Research Classification > COMMERCE MANAGEMENT TOURISM AND SERVICES (150000)
Divisions: Current > Research Centres > Australian Centre for Philanthropy and Nonprofit Studies
Current > QUT Faculties and Divisions > QUT Business School
Current > Schools > School of Accountancy
Copyright Owner: Copyright Sage 2013.
Deposited On: 07 Jun 2013 07:21
Last Modified: 17 Apr 2014 03:01

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