CONSERVATISM AND THE COST OF EQUITY CAPITAL: A MULTI-DIMENSIONAL MEASUREMENT APPROACH

Abstract

Conservatism is a permanent phenomenon and issue in the accounting practice. It has been
developing in two forms, ex ante and ex post, measured in various ways—the accruals,
valuation model, and book-to-market measures. Prior studies document inconclusive findings
on the association between conservatism and the cost of equity capital. These inconsistent
findings motivate us to examine whether the various measures of conservatism have different
effects on the relationship between conservatism and the cost of equity capital. We
find that the accruals measure explains the relationship, while the valuation model and
book-to-market measures do not. Our findings suggest that different measures of conservatism
relate differently to different articulations. Researchers, therefore, should be cautious in
interpreting the relationship between conservatism and the cost of equity capital.
Keywords: ex ante and ex post conservatism, cost of equity capital, various measures of
conservatism