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.
