An Empirical Analysis On How Conservatism Influences Cost Of Equity Capital: Evidence From Turkey

Year 2017, Volume: 12 Issue: 48, 125 - 139, 28.07.2017

Mehtap Öner Aslı Aybars , Hüseyin Ekizler

https://doi.org/10.14783/maruoneri.vi.331582

Abstract

An extensive review of literature focusing on theoretical and analytical studies reveals that equity

markets will benefit from accounting conservatism due to the increase in overall information

quality. Conditional conservatism, which is evaluated as to the asymmetry between the impact of

good and bad news on earnings, is regarded to be a substitute of discretionary disclosure. Therefore,

as the firms increase the extent of their voluntary disclosures, the cost of raising capital is alleviated

since this cost depends on how much information is attained by the firms’ potential investors.

This study conducts a two stage analysis on a data set of nonfinancial firms listed on Borsa Istanbul

2005-2014, inclusive. Accordingly, the existence of conditional conservatism is tested by using

cross-sectional regression based on the asymmetric timeliness model developed by Basu (1997)

modified by Khan and Watts (2009). Consequently, the resulting firm-year measure of conditional

conservatism is used as the explanatory variable of the panel data analysis. The originality of the paper

stems from the fact that it attempts to provide evidence on the economic consequences of discretionary

accounting practices from Turkey in this specific strand of literature related to the equity

investors’ required rates of return.

Keywords

Conditional Conservatism, Emerging Markets, Cost Of Equity Capital, Cross-Sectional Analysis

References

• Zhang, J. (2008). The Contracting Benefits of Accounting Conservatism to Lenders and Borrowers, Journal of Accounting and Economics, 45.1, 27-54.