The Role Of Voluntary Disclosure, Earnings Quality And Information Asymmetry On The Cost Of Capital

Abstract

The cost of capital is a critical issue for stakeholders in companies such as management, investors and creditors, because companies with a low cost of capital are seen as less risky. In addition, when there is more information available about a company, the company‘s stock usually become more liquid. Stock liquidity is central to the efficient functioning of trade in financial markets and is determined in part by the extent of information asymmetry among traders. To further explore how the cost of capital can be decreased, this study investigate the following relationship; a) the mediation effect of information asymmetry on the relationship between voluntary disclosure and cost of capital, b) the mediation effect of information asymmetry on the relationship between earnings quality and cost of capital. c) The mediation effect of voluntary disclosure on the relationship between earnings quality and the cost of capital. d) the simultaneous relationship between earnings quality and voluntary disclosure. This study employs panel data analysis to an initial sample of 72 listed companies (333 company/year observations) in the first market of the Amman Stock Exchange (ASE) covering a 10-year period ending in the year 2015. The empirical results of this study show that information asymmetry does not mediate the relationship between voluntary disclosure and the cost of capital or between earnings quality and the cost of capital. Low voluntary disclosure, low earnings quality and the practice of earnings management by Jordanian companies are the main factors that are identified as being behind the insignificant mediation effect of information asymmetry in this study. The result provides evidence that there is a mediation effect of voluntary disclosure on the relationship between earnings quality and the cost of capital. Therefore, the result supports the assumption that earnings quality is a determinant of voluntary disclosure and due to a complementary relationship between the two variables. This result is also indicative of the weak regulations on voluntary disclosure and quality reporting in emerging countries, which in turn implies that the regulations and the extent of voluntary disclosure are not in line with each other.