Earning Conservatism and the Cost of Equity Capital: From the Perspective of Investor Protection

摘要

High quality accounting information is expected to protect investors by reducing information asymmetry risk and agency cost. This paper employs the data of firms listed in Shanghai and Shenzhen Stock Exchange, and tests this hypothesis. Using earning conservatism as proxy for earning quality and information asymmetry risk, the author adopts Basu(1997) model of conservatism and research on the issues. The results show that conservatism is an important earning attribute and investor protection indicator under the circumstance of appropriate conservatism, which can bring the low cost of equity capital. In the meantime, the paper finds the phenomenon of the "abnormality of cost of equity capital for the high conservatism", The conclusion of this paper plays an important role in understanding the economic consequence of conservatism and its accounting system meanings.