File Download
Supplementary

Working Paper: Conditional Conservatism and the Cost of Equity Capital: Informational, Fundamental and Behavioral Effects

TitleConditional Conservatism and the Cost of Equity Capital: Informational, Fundamental and Behavioral Effects
Authors
KeywordsConditional conservatism
Cost of equity capital
Asset pricing tests
Sarbanes-Oxley Act (SOX)
Issue Date2012
AbstractConditional conservatism (CON) is related to the cost of equity capital in a complex way, especially in imperfect markets. Prior literature suggests that CON affects the information precision and information asymmetry, resulting in either increased or decreased cost of equity. In addition, CON may influence firms’ investment decisions and exacerbate their fundamental operating risks, and investors are asymmetrically loss-averse to more bad earnings news reporting via conservative disclosure, both of which contribute to a higher equity cost. This paper empirically examines the impact of CON on the cost of equity capital through these informational, fundamental and behavioral risk effects, and detects a significantly positive association between CON and equity cost by adopting accounting-based CON proxies and equity cost measures adjusted for unexpected cash flow shocks. Using the Sarbanes-Oxley Act (SOX) as a natural experiment, we find that the positive CON-equity cost relation disappears in the post-SOX period, consistent with diminished informational, operational, and behavioral risk effects engendered by SOX regulations.
Persistent Identifierhttp://hdl.handle.net/10722/169418

 

DC FieldValueLanguage
dc.contributor.authorBiddle, GCen_US
dc.contributor.authorMa, Len_US
dc.contributor.authorWu, F.en_US
dc.date.accessioned2012-10-18T08:53:55Z-
dc.date.available2012-10-18T08:53:55Z-
dc.date.issued2012en_US
dc.identifier.urihttp://hdl.handle.net/10722/169418-
dc.description.abstractConditional conservatism (CON) is related to the cost of equity capital in a complex way, especially in imperfect markets. Prior literature suggests that CON affects the information precision and information asymmetry, resulting in either increased or decreased cost of equity. In addition, CON may influence firms’ investment decisions and exacerbate their fundamental operating risks, and investors are asymmetrically loss-averse to more bad earnings news reporting via conservative disclosure, both of which contribute to a higher equity cost. This paper empirically examines the impact of CON on the cost of equity capital through these informational, fundamental and behavioral risk effects, and detects a significantly positive association between CON and equity cost by adopting accounting-based CON proxies and equity cost measures adjusted for unexpected cash flow shocks. Using the Sarbanes-Oxley Act (SOX) as a natural experiment, we find that the positive CON-equity cost relation disappears in the post-SOX period, consistent with diminished informational, operational, and behavioral risk effects engendered by SOX regulations.-
dc.languageengen_US
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.subjectConditional conservatism-
dc.subjectCost of equity capital-
dc.subjectAsset pricing tests-
dc.subjectSarbanes-Oxley Act (SOX)-
dc.titleConditional Conservatism and the Cost of Equity Capital: Informational, Fundamental and Behavioral Effectsen_US
dc.typeWorking_Paperen_US
dc.identifier.emailBiddle, GC: biddle@hku.hken_US
dc.identifier.authorityBiddle, GC=rp00230en_US
dc.description.naturepostprint-
dc.identifier.hkuros211877en_US
dc.identifier.spage1-
dc.identifier.epage48-

Export via OAI-PMH Interface in XML Formats


OR


Export to Other Non-XML Formats