The Effect of Conditional and Unconditional Accounting Conservatism on Cost of Debt Financing: Evidence from Iran

This research examines the effect of conditional and unconditional accounting conservatism on cost of debt financing. In this study, the models of Ball and Shivakumar (2005) and Givoly and Hyan (2002) are adopted and applied to measurement of conditional and unconditional conservatism, respectively. From among the population of the listed companies on Tehran Stock Exchange (TSE), using systematic filtering procedure, 122 companies are selected as the statistical sample and using panel data method became subjected to multivariate linear regression analysis. The obtained results from test of the first hypothesis indicate positive and significant effect of conditional conservatism on cost of debt financing, that is, with an increase of conditional conservatism, cost of debt financing rises as well, and vice versa. In addition, the results on test of the second hypothesis indicate negative and significant effect of unconditional conservatism on cost of debt financing, i.e. an increase in the level of unconditional conservatism coincides with some reduction in cost of debt financing. The varying reaction of the debt cost to the conditional and unconditional conservatism could be attributed to the construct of the two measures, since the conditional conservatism which was measured by the model of Ball and Shivakumar (2005) is a profit-and-loss driven indicator, whereas the unconditional conservatism which was measured by the model of Givoly and Hyan (2002) is a balance sheet driven indicator. Or, as suggested by Givoly et al (2007), it might arise from varying reporting environments, types of industry, and time periods

Keywords:

conservatism , conditional conservatism , unconditional conservatism , cost of debt financing