An Empirical Study On The Influence Of Accounting Conservatism To The Cost Of Equity Capital

The cost of equity capital is one of the classical topics of earlier research in the field ofaccounting, and is also a difficult problem in modern financial theory that still existed. Inreliable capital market, financial activity is one of the activities that enterprise long-termmanagement should undertake, a large amount of research shows that in China’s capital market,there is strong preference for equity financing, so equity capital that Listing Corporation needsto pay when doing equity financing still attracts most concern in capital market. Presentempirical experience shows accounting conservatism in corporate is increasing, conservativefinancial information help to protect investor. And accounting has contract functions, withdevelopment of the relevant theory, conservatism has been regarded as important factorsreflecting cost of equity capital. Accounting conservatism can reduce information asymmetrybetween stakeholders, avoid adversing selection and moral risk of investors. Therefore theincreased conservatism degree, not only is an important contribution to decreasing cost ofequity capital, also has long-term effects in raising market effectiveness. The state-ownedenterprise affected by the nature of incomplete system reform, makes the contract relationshipbetween creditors is not clear. At state-owned listing corporate, because of owners absence,internal control issues seems more promient, more internal people participate into financialinformation processing and publishing, which makes bad impact on quality of accountinginformation, conservatism let people worried. Under this situation, relation betweenaccounting conservatism and cost of equity capital is worth studying.The main content of this paper is relation between accounting conservatism and cost ofequity capital, and also analyzed the influence of owned state nature related to this relation. Atfirst, this paper reviews the research results of domestic and foreign scholars, defines theconcept of accounting conservatism and the cost of equity capital. Based on the contract theory,signal transmission theory and information asymmetry theory, this paper propose itshypothesis, selecting sample data of2011-2013years in Shanghai and Shenzhen A shares andchoose C-score and PEG methods to measure accounting conservatism and the cost of equitycapital, constructing suitable model for empirical research.The results show that, accounting conservatism generally exists in Chinese listing corporation, and higher accounting conservatism degree leads smaller risk for investors to face,the necessary investment return that investors require will be reduced, resulting in lower costof equity capital. In addition, compared with state-owned enterprise, conservatism in nonstate-owned enterprise can reduce cost of equity capital more obviously. To investors,choosing enterprise with high level accounting conservatism could make the risk level theyneed to face to be lower relatively. To enterprise, improving the level of accountingconservatism can effectively reduce the cost of equity capital. So, the research of this paperprovides direction and new empirical evidence for enterprise and investor decision making.