Relationship between Debt Ratio, Size and Cost of Capital of Firm with Conditional and Unconditional Conservatism

Abstract

In this study, the relationship between factors including debt ratio, size and capital cost of firm with conditional and unconditional conservatism in the Tehran Stock Exchange is investigated. The model of Ahmed and Duellman (2007) and the model of Givoly and Hayn (2000) were used to measure the conditional and unconditional conservatisms, respectively. The statistical sample included data from 91 companies, which is collected and analyzed for the period 1383 to 1390. The data analysis of panel data within a fixed effects model was employed. The results show that there is a significant positive relationship between debt ratio and both the conditional and unconditional conservatisms. This confirms the hypothesis that debt contracts are the most important sources of demand for conservatism. Also, there is a significant negative relationship only between firm size and unconditional conservatism, and that there is no relationship between cost of capital and both the conditional and unconditional conservatisms.

Keywords

• debt ratio
• size
• cost of capital
• conditional conservatism
• unconditional conservatism