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

TitleConditional Conservatism and the Cost of Equity Capital: Information Precision and Information Asymmetry Effects
Authors
Issue Date2016
PublisherRedFame Publishing Inc. The Journal's web site is located at http://afa.redfame.com
Citation
Applied Finance and Accounting, 2016, v. 2 n. 1, p. 69-88 How to Cite?
AbstractPrior 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.
Persistent Identifierhttp://hdl.handle.net/10722/222582
ISSN

 

DC FieldValueLanguage
dc.contributor.authorBiddle, GC-
dc.contributor.authorMa, MLZ-
dc.contributor.authorWu, F-
dc.date.accessioned2016-01-18T07:43:18Z-
dc.date.available2016-01-18T07:43:18Z-
dc.date.issued2016-
dc.identifier.citationApplied Finance and Accounting, 2016, v. 2 n. 1, p. 69-88-
dc.identifier.issn2374-2410-
dc.identifier.urihttp://hdl.handle.net/10722/222582-
dc.description.abstractPrior 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.-
dc.languageeng-
dc.publisherRedFame Publishing Inc. The Journal's web site is located at http://afa.redfame.com-
dc.relation.ispartofApplied Finance and Accounting-
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.titleConditional Conservatism and the Cost of Equity Capital: Information Precision and Information Asymmetry Effects-
dc.typeArticle-
dc.identifier.emailBiddle, GC: biddle@hku.hk-
dc.identifier.authorityBiddle, GC=rp00230-
dc.description.naturepublished_or_final_version-
dc.identifier.doi10.11114/afa.v2i1.1225-
dc.identifier.hkuros256771-
dc.identifier.volume2-
dc.identifier.issue1-
dc.identifier.spage69-
dc.identifier.epage88-
dc.publisher.placeUnited States-

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