Accounting Conservatism and Cost of Equity Capital – Evidence from Indonesia

Abstract

This paper describes the results of the research that investigates the association between ex-post conservatism or conditional conservatism and cost of equity capital in Indonesian manufacturing companies using data from 2015 to 2019. Conservatism is measured using accrual methods while equity capital costs are measured using a price/earnings growth (PEG) model. Using data from 142 companies or 710 observations, selected using purposive sampling methods, the study concludes that ex-post accounting conservatism lowered the company’s cost of equity capital. These results not only confirm previous research conducted in other countries, but also the agency theory which predicts that accounting conservatism lowers the asymmetry of information between the company’s management and shareholders, thereby affecting the decrease in equity capital costs.

Keywords

• conservatism
• equity capital costs
• accrual methods
• peg model