The Impact of Accounting Conservatism on Investment Efficiency and Cost of Capital: Evidence from Non-Financial Listed Firms in Saudi Arabia
Abstract
Purpose: This research aims to examine the impact of accounting conservatism on investment efficiency and the cost of capital within the Saudi Arabian corporate context following the implementation of Saudi Vision 2030. Methodology: This study analyzes panel data from 105 non-financial listed firms on the Saudi Stock Exchange (Tadawul) from 2016 to 2024. To fulfill the structural requirements for measuring investment efficiency, the sample is restricted to sectors containing a minimum of 10 firms. The empirical framework relies on four robust Ordinary Least Squares (OLS) econometric models to evaluate the hypothesized relationships. Findings: The empirical findings indicate two primary results. First, accounting conservatism exerts a significant positive impact on investment efficiency. Second, statistical tests reveal that accounting conservatism has a nuanced, asymmetric, and non-linear impact on the components of the cost of capital—specifically, the weighted average cost of capital (WACC), cost of equity (COE), and cost of debt (COD)—when conditioned across three distinct regimes: the full sample, underinvesting firms, and overinvesting firms. These results challenge traditional linear assumptions, indicating that a state-contingent framework better explains market reactions to financial reporting strategies. Implications and Recommendations: The findings suggest that decision makers should abandon the assumption that maximizing accounting conservatism is a universally risk-averse or beneficial strategy. Instead, corporate managers should treat accounting conservatism as a strategic instrument governed by definite thresholds, as its impact on financing costs is deeply tied to a firm’s structural investment realities. Regulatory bodies and standard setters in the Saudi market are encouraged to integrate these non-linear insights when evaluating the capital market effects of financial transparency reforms.