An Investigation of the Association between Levels of Accounting Conservatism and Corporate Cost of Debt

Abstract

This research aimed at exploring the relationship between accounting conservatism and cost of debt. Debt in this study was corporate bonds. Past researches found continues negative relationship between levels of accounting conservatism and interest rate. The aim of this research was to study if this relationship is also applied in Egypt. Using an empirical research and a sample selected from publicly-traded Egyptian firms that issued bonds, the finding was not in consistent with the literature. The research results indicated that level of accounting conservatism adopted in a firm influence the cost of debt, and that this influence is not constant all the time; different levels of conservatism affect the cost of debt by different ways. For this, accounting conservatism should be used with caution, so that the level adopted within the firm don’t exceed the accepted limit to gain the benefit. However, accounting conservatism is not always good instrument in reducing interest rate, and it should be used with care.