Accounting Conservatism and the Cost of Debt: Evidence from Iraq

Abstract

The current study was focused on analyzing the tradeoff between Accounting Conservatism (AC) and the cost of debt by examining two relationships. The first relationship evaluates the effect of debtholders/shareholders conflicts on the level of unconditional AC represented in no N-Operating Accruals (NOA). The second relationship examines the effect of unconditional AC represented in NOA on the cost of debt. This study tried to examine these relationships using a sample of 122 firm year observations to the period 2016-2017 on the Iraq Stock Exchange. This study found positive relationship between AC and the debtholders/shareholders conflicts, i.e., increasing standard deviations of the return on assets as a proxy of operating uncertainty and dividends ratio leads to increase the NOA as a proxy for Unconditional Conservatism (UCC). In addition, found positive relationship between NOA and the cost of debt and negative relationship between firm size represented in total assets and the cost of debt, i.e., increasing the AC by minimizing the accruals leads to lower cost of debt and increasing total assets as guarantee for the creditors leads to lower cost of debt.