Accounting Standards Changes, Cost of Capital and Corporate Investment Behavior:Theoretical Analysis Based on Capital Asset Pricing Model

Abstract

Abstract:

It is usually thought that higher quality accounting standards will decrease the cost of capital by improving financial reporting quality. However, through a deep theoretical analysis based on Capital Asset Pricing Model (CAPM), we find that higher quality accounting standards can also result in the increase of cost of capital because of the indirect-reversal effects through corporate investment. We give the specific condition of this situation, i.e., the adjustment cost of new investment (z) is sufficiently low to guarantee the sufficient elasticity of new investment. Besides, this study introduces the two most common types of agency problems (i.e., the conflict between managers and shareholders, the conflict between large shareholders and small shareholders) into the analytical models further. Although corporate investment behaviors and optimal investment levels change due to agency conflicts, the basic conclusions above still hold. Thus, our study clarifies the relationship between accounting standards, cost of capital and corporate investment in theory, which deepens the theory of unintended effects of accounting standards changes. It also has some important implications for empirical research in this field and the setting and testing of accounting standards objectives.

Key words: accounting standards changes, cost of capital, corporate investment behavior, CAPM, agency problems

Zhang Xianzhi, Yan Chao. Accounting Standards Changes, Cost of Capital and Corporate Investment Behavior:Theoretical Analysis Based on Capital Asset Pricing Model[J]. , 2018, 30(4): 206-218.

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