Conditional Conservatism and Debt versus Equity Financing

Abstract

Extant research suggests that conditional conservatism reduces information asymmetry between a firm and its shareholders as well as its debtholders. However, there is little evidence on whether conditional conservatism reduces information asymmetry differentially for shareholders and debtholders. We use the setting of a firm's choice between equity versus debt when it seeks a significant amount of external financing to examine this research question. We find that when firms raise a significant amount of external financing, the use of equity (versus debt) increases with the level of conservatism. We also find that the reduction in cost of equity associated with conservatism is greater for equity issuers than for debt issuers, but find no such difference when we examine cost of debt. In addition, we find that the positive effect of conservatism on the choice of equity issuance (versus debt issuance) is accentuated when the information asymmetry between the firm and its shareholders is more severe. Overall, our results suggest that conservatism reduces information asymmetry more between firms and shareholders than between firms and debtholders. Prudence conditionnelle et financement par emprunt ou par capitaux propres R ESUM E Selon les etudes existantes, la prudence conditionnelle r eduit l'asym etrie de l'information entre une soci et e et ses actionnaires de m^ eme que ses cr eanciers. Toutefois, rares sont les donn ees concluantes quant a savoir si cette r eduction de l'asym etrie de l'information attri-buable a la prudence conditionnelle diff ere pour les actionnaires et les cr eanciers. Pour etu-dier la question, les auteurs utilisent le contexte du choix d'une soci et e entre le financement par capitaux propres ou par emprunt lorsque ses besoins de financement externe sont importants. Ils constatent que, dans le cas des soci et es dont ces besoins sont importants, le recours aux capitaux propres (par opposition au recours a l'emprunt) augmente avec le degr e de prudence. Les auteurs observent egalement que la r eduction du co^ ut des capitaux propres associ ee a la prudence est plus importante dans le cas des soci et es emettrices d'ac-tions que dans celui des soci et es emettrices de titres de cr eance, mais ils ne rel event aucun ecart de cette nature pour ce qui est de co^ ut de la dette. Ils constatent en outre que * Accepted by Sudipta Basu. We thank Sudipta Basu, Patricia O'Brien, two anonymous reviewers, Zeyun l'incidence positive de la prudence sur le choix de l' emission d'actions (plut^ ot que de titres de cr eance) s'accentue lorsque l'asym etrie de l'information entre la soci et e et ses actionnai-res est plus marqu ee. Dans l'ensemble, les r esultats de l' etude semblent indiquer que la prudence r eduit davantage l'asym etrie de l'information entre les soci et es et les actionnaires qu'entre les soci et es et les cr eanciers.

Accounting Conservatism and Cost of Equity Capital – Evidence from Indonesia

“…Li (2015), and Khalifa et al (2018) reporting that accounting conservatism lowers the cost of equity capital. The above results also reinforce the findings of Goh et al (2017) which prove that there is a decrease in equity capital costs when conservatism levels increase, Razzaq & Rui (2018) find that conditional conservatism lowers the cost of equity capital in Chinese companies, and Razzaq (2019) reports that conditional conservatism lowers the cost of equity capital in companies in Pakistan. These results also confirm the agency's theory that information asymmetry will decrease when accounting conservatism increases.…”

The Role of Accounting Conservatism in Capital Structure Adjustments

“…However, recent research suggests that conservatism can create a preference for equity over debt. Specifically, Goh et al (2017) examine firms’ choice between equity and debt when raising a significant amount of external financing, and find that firms with higher conservatism are more likely to issue equity than debt. They further show that higher conservatism reduces information asymmetry between firms and shareholders more than that between firms and debtholders, and that higher conservatism reduces the cost of equity more than the cost of debt.…”

“…First, the convergence of leverage toward the target requires firms to choose equity versus debt based on their leverage relative to the target leverage (i.e., under-levered firms issue more debt and over-levered firms issue more equity). However, recent work of Goh, Lim, Lobo, and Tong (2017) find that conservatism reduces the cost of equity more than the cost of debt, and that firms with higher conservatism are more likely to issue equity rather than debt. Their findings suggest that higher conservatism can create an unconditional preference for equity over debt, resulting in downward shift in leverage for both over-levered and under-levered firms rather than a convergence (mean reversion) of leverage toward the target.…”

أثر تبنی المعاییر الدولیة للمحاسبة ومراحل دورة حیاة المشروع على مستوى التحفظ المحاسبی دراسة تطبیقیة على الشرکات المقیدة بسوق الأسهم السعودی

“…However, adopting IFRS leads to a significant decrease in conditional conservatism in the mature stage only, but with no significant effect in other life stages, and it has no significant effect on the total conservatism in any lifer stage. (Bradford et al 2017;Arabiat and Khamees, 2016;Zeghal and Lahmar (2016;Andre et al 2015;Poit et al 2015;Lai et al 2013;) ‫أخرى‬ ‫دراسات‬ ‫رأت‬ (Zhang, 2011;Balsari et al 2010;Barth et al 2008 (Goh et al 2017;Mitra et al 2016;Lara et al 2016;Donovan and Martin, 2015;Lee et al 2015;Lara et al 2014;Lai et al 2013;Lee et al 2012;Goh and Li, 2011;Lara et al 2009) . (Goh et al 2017;Heflin et al 2015;Gao, 2013;Lai et al 2013;Hui et al 2012;Goh and Li, 2011;Khan and Watts, 2009 (Hansen et al 2018;Mora and Walker, 2015;Neag and Masca, 2015;Ryan, 2006;Beaver and Ryan, 2005) ‫المشروط‬ ( Cho and Choi, 2016;Defond et al 2016;Mitra et al 2016;Lara et al 2016;Dai and Yang, 2015;Khurana and Wang, 2015;Donovan and Martin, 2015;Lara et al 2014;Bertin and Moya, 2013;Heflin et al 2013;Lai et al 2013;…”