Impact of Conditional Conservatism and Agency Cost on Investment Cash Flow Sensitivity

Purpose of this research is to give the factual confirmation about the impact of conditional conservatism over the company investment cash flow sensitivity and its impact is more on those firms with higher agency cost as compared to lower agency cost firm. Researcher used the dividend payout ratio to estimate the cost of the agency, as the study uses Pakistan as a research condition in which organizations in Pakistan focus concentrated ownership and financing through debt, in this case the conflict of the agency which seems to be the most commanding is the agency’s dispute. This study used secondary data which is collected from the listed manufacturing company’s annual reports available on their website on Pakistan Stock Exchange. Study used sample of 147 companies of manufacturing sector listed and traded on the Pakistan Stock Exchange during the period 2008 to 2017, out of them 73 companies were high agency cost firms and 74 were low agency cost firms.  Study used ordinary least squares regression. The results indicate that timely recognition of losses (application of conditional conservatism), firm sensitivity of investment to its cash flows reduces. Conditional conservatism reduces investment cash flow sensitivity in higher agency cost firms however expands the sensitivity in lower agency cost firms. Actually, prior to execution of conditional conservatism, high agency cost firms have lower investment cash flow sensitivity.