ACCOUNTING CONSERVATISM AND FUTURE INVESTMENT OPPORTUNITIES

Abstract

This research investigates the relationships between accounting conservatism, captured using the timelier recognition of economic losses and future investment opportunities, and the mediating role of the implied costs of equity capital on those relationships of Thai listed firms during the period of 2005-2011. Conservatism benefits debt markets as an efficient mechanism of contracting and governance. Its usefulness to equity markets is however little explored and thus remains ambiguous, especially in the emerging market of Thailand where high foreign fund flows reflect the increasing need of external equity for business expansion, while corporate growth is severely restricted by agency problems. The timelier loss recognition can mitigate those problems by constraining managers’ ability to withhold losses and accelerate the recognition of unverified gains to appropriate outside shareholders’ wealth. This study hypothesizes the positive associations between conservatism and investment opportunities, and those positive associations are mediated by lower implied costs of equity capital. This research study finds that firms with a higher (lower) degree of accounting conservatism are more (less) likely to have higher future investment opportunities. The results hold after controlling for information asymmetry and using a realized proxy of investment opportunities. Nevertheless, no evidence of the mediating role of the implied costs of equity capital and the moderating role of information asymmetry is discovered. The results also indicate that firms with lower (higher) implied costs of equity capital are more (less) likely to enjoy future investment opportunities. Overall, the research provides evidence to verify that accounting conservatism through the timelier loss recognition by Thai firms benefits future investment opportunities.