The Interactive Effect of Capital Productivity and Accounting Conservatism on Cost of Capital in Tehran and Istanbul Stock Exchange Markets
Subject Areas : Business Management
Ebrahim
Navidi Abbaspour
1
(Department of Accounting and Financial Management, Faculty of Economics and Administrative Sciences, Atatürk University, Erzurum, Turkey)
Mehmet
Suphi Orhan
2
(Prof. Dr. M.Suphi Orhan, Accounting and Finance Department, Faculty of Economic and Administrative Sciences, Ataturk University, Erzurum, Turkey)
Keywords: Accounting Conservatism, Cost of Capital, Capital Productivity,
Abstract :
Capital productivity concerns the measurement of managerial capacity to make optimal use of capital as one of the company's most important and restricted resources and accounting conservatism is one of the qualitative characteristics of accounting information. More conservative companies are expected to have lower cost of capital and the increase in capital productivity is assumed to intensify this relationship. The present study explored the interactive effect of capital productivity and accounting conservatism on cost of capital in Tehran and Istanbul stock exchange markets. Accounting conservatism was measured as the chronological asymmetry between the profit and relative market value of stock to book value while capital productivity was operationalized in terms of the ratio of operating profit to the difference between total equity and debt in cash and short-term investment. The research sample comprised 118 companies listed in Tehran and 194 companies listed in Istanbul stock exchange markets over a period of 10 years from 2006 to 2015. The findings revealed that accounting conservatism, as the ratio of market to book value, was negatively correlated with cost of capital both in Tehran and Istanbul stock exchange markets; capital productivity was found to have a synergistic effect on this relationship. Additionally, accounting conservatism, as chronological asymmetry, was found to be negatively correlated with cost of capital in Istanbul stock exchange market.
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Chan, L. C., Lin, S. W. J., & Strong, N.(2009), Accounting Conservatism and the Cost of Equity Capital: UK Evidence. Managerial Finance, 35(4), 325-345.
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Hendriksen, E.S.(1982), Accounting Theory. Homewood: Irwin Publication.
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Kordestani, G., & Hadadi, M.(2009), The Relationship between Accounting Conservatism and Cost of Capital. Master Thesis, Tehran: Islamic Azad University Central Tehran Branch, (In Persian).
La Fond, R.W.(2007), The Information Role of Conservatism. Working Paper, Massachusetts Institute of Technology.
Lara, J.(2007), Cost of Equity and Accounting Conservatism. IESE Business School, University of Navarra.
Mohammadzadeh Salteh, H.(2016), The Effect of Investment Opportunities, Growth and Capital Productivity on Firm Performance of Listed Companies in Tehran Stock Exchange. Quarterly Journal of Productivity Management, 36 (In Persian).
Salimi, A.(2007), Evaluation of Capital Cost. Journal of Hesabras, 37, (In Persian).
Verdi, R.S.(2006), Financial Reporting Quality and Investment Efficiency. Working Paper, Massachusetts Institute of Technology.
Watts, R.(2003), Conservatism in Accounting. Part I: Explanations and Implications. Accounting Horizons, 17(3).
Watts, R.L.(2000), Conservatism in Accounting. Part II: Evidence and Research Opportunities. Accounting Horizons, 21
_||_Basu, S.(1997), The Conservatism Principle and the Asymmetric Timeliness of Earnings. Journal of Accounting and Economics, 24, 3-37.
Brown, D. P., & Rowe, B. J.(2007), The Productivity Premium in Equity Return. University of Wisconsin US.
Chan, L. C., Lin, S. W. J., & Strong, N.(2009), Accounting Conservatism and the Cost of Equity Capital: UK Evidence. Managerial Finance, 35(4), 325-345.
Davis, E. P., & Madsan, J.B.(2008), Productivity and Equity Market Fundamentals: 80 Years of Evidence for Eleven OECD Countries. Journal of International Money and Finance Forthcoming.
Francis, J. R., La Fond, P., & Schipper, K.(2004),Cost of Equity and Earnings Attributes. The Accounting Review, 79(4), 967-1010.
Gordon, J., & Gordon, M.(1997), The Finite Horizon Expected Return Model. Financial Analysts Jurnal, 49(5), 36-38.
Hendriksen, E.S.(1982), Accounting Theory. Homewood: Irwin Publication.
Kordestani, G., & Amirbeygi, H.(2008), Conservatism in Financial Reporting: Asymmetric Timeliness of Earnings and MTB. Journal of the Accounting and Auditing Review, 52, (In Persian).
Kordestani, G., & Hadadi, M.(2009), The Relationship between Accounting Conservatism and Cost of Capital. Master Thesis, Tehran: Islamic Azad University Central Tehran Branch, (In Persian).
La Fond, R.W.(2007), The Information Role of Conservatism. Working Paper, Massachusetts Institute of Technology.
Lara, J.(2007), Cost of Equity and Accounting Conservatism. IESE Business School, University of Navarra.
Mohammadzadeh Salteh, H.(2016), The Effect of Investment Opportunities, Growth and Capital Productivity on Firm Performance of Listed Companies in Tehran Stock Exchange. Quarterly Journal of Productivity Management, 36 (In Persian).
Salimi, A.(2007), Evaluation of Capital Cost. Journal of Hesabras, 37, (In Persian).
Verdi, R.S.(2006), Financial Reporting Quality and Investment Efficiency. Working Paper, Massachusetts Institute of Technology.
Watts, R.(2003), Conservatism in Accounting. Part I: Explanations and Implications. Accounting Horizons, 17(3).
Watts, R.L.(2000), Conservatism in Accounting. Part II: Evidence and Research Opportunities. Accounting Horizons, 21
