IDEAS home Printed from https://ideas.repec.org/a/rfa/afajnl/v2y2016i1p69-88.html
   My bibliography  Save this article

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

Author

Listed:
  • Gary C. Biddle
  • Mary L. Z. Ma
  • Feng Wu

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.

Suggested Citation

  • Gary C. Biddle & Mary L. Z. Ma & Feng Wu, 2016. "Conditional Conservatism and the Cost of Equity Capital: Information Precision and Information Asymmetry Effects," Applied Finance and Accounting, Redfame publishing, vol. 2(1), pages 69-88, February.
    • Handle: RePEc:rfa:afajnl:v:2:y:2016:i:1:p:69-88
    as

    Download full text from publisher

    File URL: http://redfame.com/journal/index.php/afa/article/view/1225/1197
    Download Restriction: no
    File URL: http://redfame.com/journal/index.php/afa/article/view/1225
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Khalifa, Maha & Zouaoui, Haykel & Ben Othman, Hakim & Hussainey, Khaled, 2019. "Exploring the nonlinear effect of conditional conservatism on the cost of equity capital: Evidence from emerging markets," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 36(C), pages 1-1.
    2. Lijuan Zhang & Mark Wilson, 2018. "Does the accruals quality premium arise from information risk?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(2), pages 599-632, June.
    3. Ratna Puji Astuti KRISMIAJI, 2021. "Accounting Conservatism and Cost of Equity Capital – Evidence from Indonesia," CECCAR Business Review, Body of Expert and Licensed Accountants of Romania (CECCAR), vol. 2(2), pages 64-72, February.

    More about this item

    Keywords

    conditional conservatism; cost of equity capital; asset pricing test; Sarbanes-Oxley Act (SOX);
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rfa:afajnl:v:2:y:2016:i:1:p:69-88. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Redfame publishing (email available below). General contact details of provider: https://edirc.repec.org/data/cepflch.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.