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

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.