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Accounting Conservatism Impact on the Cost of Finance of Chinese Listed Companies

Author LiYang
Tutor LouYingJun
School Zhejiang Technology and Business University
Course Finance
Keywords accounting conservatism cost of equity cost of debt sustainability
Type Master's thesis
Year 2014
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The intrinsic requirement for accounting conservatism is the asymmetric timeliness of current message acknowledgment:in other words, the benefits from the postponed confirmation of good news, and the losses from the promptly confirmation of bad news. This asymmetry timeliness accounting information can reflect the bad news of the enterprise market environment timely to creditors and equity investors, investors can make a judgment according to these reports. They can withdraw the principal or improve the interest rates and the requirements of return on investment. As a result, for enterprises with higher accounting conservatism, investors can get a much better guarantee of rights and interests through this mechanism. Rational bonds and equity investors would offer lower interest return on investment for enterprises with prudent measures because of asymmetric information and reduction of ethics risks in management. That’s why accounting conservatism plays an important role in reducing the cost of financing.Through the research on4017samples from2010to2012of A-share listed companies in three years(which excludes financial&insurance companies, ST companies, listed companies in the same year, companies with incomplete data), we found that conservatism had remarkable effects on reducing the cost of debt of listed companies in China. Through the2484samples by the same selection criteria for2010and2012, we found that conservatism also had remarkable effects on reducing the cost of equity.To ensure the authenticity of empirical results, the paper excluded deficit sample companies and made a re-examination on the two empirical results to exclude the impact of the deficit company, and further confirmed the significant effects accounting conservatism on reducing the cost of debt and equity.But if the companies adopted the accounting conservatism policies, they also need to pay certain costs. Such as poor performance on financial reports and reputation of management level be affected. These costs willweaken the effectaccounting conservatism on reducing financing costs to some extent.As the degree increases in accounting conservatism, the cost will also risegradually. Therefore, it’s necessary to do further research on different levels of group impact on financing costs.Through the grouping ofdebt and equity components of the sample, in accordance with the mutual authenticationfor the empirical results, we found that the effect accounting conservatism on lowering financing costs is not that continuous.When the accounting conservatism is in lower degree, it costs less. But even after improvement, it’s still not in a high degree. Thus the effects on lower financing costs stays in general level. Medium degree has the most obvious effect. When raised to a high degree,it cost too much and it would be less effective. The improvement in degree can only reduce a small amount of the costs of debt. In other words, bond and equity investors making decisions according to the level of accounting conservatism of enterprises and the variation of it. And it needs to pay certain cost when adopt financialaccounting conservatism. The combined effects of these three aspects determined whether the level of accounting conservatism can reduce the cost of debt.In addition, by comparing and analyzing the two empirical parts, we found that compared to debt investors, equity investors not only concerned about the safety of principal, but also the growth of corporate value. For the cost of debt, because of certain risk on management, high-growth companies always demanded by the creditors with higher interest rates. But equity investors prefer to invest companies with more growth in nature. It had been reflected in the two empirical results in measure of different kinds of symbols of growth variables.

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