Cost of equity capital: the role of stakeholders’ rights protection in moderating financial information risk

Subject Areas : Corporate Finance

Mohammad Hassani ¹ , Maryam Jabarvand Behrouz ²

1 - Department of Accounting, North Tehran Branch, Islamic Azad University, Tehran, Iran.
2 - Department of Accounting, North Tehran Branch, Islamic Azad University, Tehran, Iran.

Received: 2022-12-20 Accepted : 2023-04-05 Published : 2023-03-21

Keywords: Cost of Equity Capital, Financial Information Risk, Stakeholders protection,

Abstract :

Purpose: This paper assessed the impact of financial information risk derived from earnings misstatement on cost of equity capital, as well as the role of stakeholder’s rights protection criterion.Methodology: The cost of equity capital is measured based on stockholders’ expected rate of return which extracted from capital asset pricing model. Also, stakeholder’s protection is assessed through various criteria such as separation of chairman’s duty, board independence, existence of internal auditor, shareholder with vote right, ownership concentration, audit adjustment, timeliness & reliability of information, disclosure of audit fee and managerial compensation. Accrual earnings management is considered as a proxy of financial information risk which is measured based on the standard deviation of residuals absolute values extracted from accrual model. Research population includes 183 firms listed in Tehran Securities & Exchange over the period 2012 to 2021. Research hypotheses analyzed through multivariate regression models using panel data by controlling industry-year effects.Findings: Findings documented that high level of financial information risk caused to increase the cost of equity capital. Also, high level of stakeholder’s protection index led to decrease the cost of equity capital; In addition, stakeholder’s protection indices weaken the impact of financial information risk on cost of equity capital.Originality/Value: The evidences showed that the implementation of governance procedures in protecting stakeholders’ rights and reducing financial information risk caused by earnings misstatement, play an important role in reducing the cost of equity capital; so, understanding this issue can be a significant point in adjusting stakeholders' expectations.

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