Synopsis: This thesis examined the effect of accounting conservatism on investment efficiency and cost of capital, along with importance and economic consequences of conservatism in emerging markets such as China and Pakistan. In addition, we investigated the CEO duality, percentage of member’s shares, dividend payoff and top one shareholder or majority shareholder’s relationships with investment efficiency and conservatism. Furthermore,reporting quality,dividend payoff and liquidity association with cost of capital and conservatism were also studied. Moreover,this study elaborates the agency conflict in extent of accounting conservatism.Literatures available show that accounting conservatism contributes to reducing the agency problems in Western economies, hence let us to find that conservative reporting reduces the agency problem in context of emerging economies particularly in both China and Pakistan. Present study plays a specific role in evoking the importance of accounting conservatism literature, and the academic research in creating diverse educational research opportunities in case of an emerging economy of Pakistan.The study herein examined the conservatism relation with investment efficiency and cost of capital in same vein of objectives. The study comprised of 142 non-financial registered Pakistani companies in six different industries from 2006 to 2011. In data sample, all these 142 non-financial listed companies were registered in Pakistan Stock Exchange (PSX). The accounting data was mined through financial statements and annual reports database systems. Most of the data was extracted and collected from annual reports of listed companies as well as PSX data portal.Furthermore, to examine the accounting conservatism relationship with investment efficiency and cost of capital in context of Chinese economy, accounting data was used from CSMAR database. Majority of the data from various firms were acquired from annual reports of A-Share listed companies for a period spanned 2002 to 2013. China Securities Regulation Commission (CSRC) is controlling all listed companies and tackles listed companies information such as stock issues, annual or semi-annual reports. This paper collected data of all non-financial Chinese companies for the last decade (2002 to 2013). The data regarding all listed companies registered in the Shenzhen and Shanghai stock exchanges was also collected through the same mechanism. However, data of only non-financial companies was selected because of variable company structure, investment environment and accounting practices of financial companies.Conservatism is being measured with different methods such as asymmetric timeliness of earning methods introduced by Basu (1997) and accrual based method of Givoly and Hayn (2002) in academic research. This study employs timely recognition of earning method of Basu (1997), later modified by Khan and Watts (2009) while in an attempt to measure the conservatism in emerging economies such as China and Pakistan. Richardson (2006) proposed a model for investment efficiency measurement of firms which was also employed in current study to measure investment efficiency in Chinese and Pakistani firms.Cost of capital was measured following Ohlson and Juettner-nauroth (2005)model or OJ-Model. To investigate the effect of accounting conservatism on investment efficiency, cost of capital, corporate governance and firm performance control are different variables being used in line with accounting conservatism variable (CCONS). For corporate governance, CEO duality (DUAL), top on shareholder (TOP1) and members percentage (MEMBRS %) were used in investment efficiency models and firm performance variables such as return on assets (ROA),leverage (LEVR), market to book value (MB), risk premium (RISKPR) and reporting quality (RPQ) were used in cost of capital models.Accounting conservatism, positively correlated with investment efficiency, and negative correlation with cost of capital showed that timely recognition of earnings(bad news) improves the investment efficiency and reduces the cost of capital in the firms of emerging economies (China and Pakistan).This study finds that accounting conservatism has a positive but non-significant association with the investment efficiency in Pakistani firms. Further, conservatism has a negative significant correlation with over-invested firms which show that accounting conservatism reduces the firms from over-investments. Herein, it claimed that accounting conservatism may improve the investment efficiency in Pakistani firms. Furthermore, a significant relationship of CEO duality with investment efficiency and conservatism was found, which is inferring that CEO duality has influenced to improve investment efficiency in Pakistan.Conversely, conservative reporting has a positive and significant relationship with investment efficiency in Chinese firms,thus, conservatism improves the investment efficiency by alleviating Chinese firms from under (over) investments. In context of China, these findings confirmed that accounting conservatism improves investment efficiency of Chinese firms. Furthermore, significant correlation existed for investment efficiency with free cash flow and corporate governance such as CEO duality and percentage of board members. In robust test, it was found that conservatism reduces the CEO duality and top one shareholder tunnelling effect which may cause agency problems in Chinese firms.Previously, much has elaborated about accounting conservatism economic consequences that conservatism reduces the cost of capital, and is beneficial for firms to outsource funds at lower interest rates. In this context, it is the pioneer study on conservatism and cost of capital that claims timely recognition of earnings reduces the cost of capital in Pakistani firms. However, this study was unable to clarify that firm’s performance is bettered by decreasing cost of capital. Overall, current study successfully depicted that timely recognition of loss over profit may lessen the cost of capital. Hence, it advocated that conservative financial reporting reduces the cost of capital in emerging markets as was previously reported (Wu, 2012; Wei, 2012; Xi,2014; Khalifa and Othman, 2015).Similarly in China, accounting conservatism has a negative association with cost of capital which presents that conditional accounting conservatism reduces the cost of capital. Therefore, it was found that conservatism declines the cost of capital by decreasing dividend payoff, and conservatism resolves the agency conflict by reducing dividend payoff. Furthermore, this research proved that efficient reporting quality will also lessen the cost of capital in Chinese firms. The Western and Chinese literature available with different settings of variables and time intervals documented that conservative reporting reduces the cost of capital, which is also in conformity with the previous reports (Guay and Verrecchia, 2007; Suijs, 2008; Artiach and Clarkson, 2010;Lara et al., 2011; Lambert et al., 2011; Wu, 2012; Wei, 2012; Li, 2014; and Khalifa and Othman, 2015)This thesis enhanced the extent of literature in same vein as using different control variables and data selection manners. In general, the positive association between accounting conservatism and investment efficiency, negative association between accounting conservatism and cost of capital, depicted the importance of conservatism practices in Pakistan and China. This study will catch attention of the academia to further investigate and debate conservatism in emerging countries such as China due to its heavy impact on global economy. Pakistan will also be benefitted because of this very first in-depth research on conservatism and its effect on investment efficiency and cost of capital.This study will help to improve accounting conservatism which can be used to indicate the empirical results,identify some issues and debate in emerging markets.The relations between accounting conservatism and investment efficiency may infer the economic consequences of conservatism in China and Pakistan. Furthermore,current study will play an important role in the accounting area and accounting research development in emerging markets, along with addition to the literature relating to accounting conservatism. The important implications of this study include:a comparative analysis view on the basis of conditional conservatism effect on investment efficiency and cost of capital. In accordance with previous reports, current study comes with different data samples, hence supporting and enhancing the academic study. Studies concerning accounting conservatism has a positive and beneficial role in any emerging economies. In the fourth coming years, such studies may have an expansion to explore in-depth mechanisms on how conservatism mitigates firms from under (over) investments and reduces the cost of capital.Furthermore,it will be more interesting to emphasize on conditional conservatism consequences, corporate governance, firm performance, cost of capital and investment efficiency by selecting a multiple period of data sets and associations of variables.