CONDITIONAL CONSERVATISM AND THE COST OF DEBT: EVIDENCE FROM CENTRAL AND EASTERN EUROPE

This study attempts to link the cost of debt to observed levels of accounting conservatism. Namely, conservative earnings reflect bad news more quickly than good news. Therefore, conservatism causes more timely recognition of losses than gains and improves quality of accounting information in context of corporate governance and loan agreements. Timely loss recognition increases efficiency of debt contracting and provides useful information to creditors. Further, conservative accounting limits the likelihood of inappropriate dividend payments and enables debt holders to use their control rights more quickly. Accordingly, lenders should reward companies that choose more conservative accounting with lower cost of debt. Level of conservatism is measured by asymmetric persistence of positive and negative earnings changes. Empirical evidence of the relation between conditional conservatism and debt cost is provided through the sample of listed companies from 17 Central and Eastern European countries in succession from 2003 to 2010, using panel data analysis