The influence of information asymmetry on the interaction between voluntary corporate disclosure and cost of equity: evidence from publicly traded Indian enterprises

Abstract

Purpose The purpose of this paper is to investigate whether information asymmetry mediates the relationship between disclosure and cost of equity. Design/methodology/approach The study is based on a sample of 500 companies listed in Bombay Stock Exchange for a period of six years from 2015 to 2021. Panel data regression is applied to analyze the relationship between voluntary disclosure, cost of equity and information asymmetry. Mediation effect of information asymmetry is tested with the help of Barron and Kenny’s (1986) approach. Findings Findings suggest that in case of Indian companies, disclosure reduces cost of equity directly and indirectly through mediation of information asymmetry. Indian investors value credible information for better estimation of future returns, supporting the validity of estimation risk and stock market liquidity hypothesis, which proposes an inverse relationship between disclosure and cost of equity. Research limitations/implications Managers can use the findings to strategize their disclosure policy and secure funds at lower cost. Shareholders can monitor managerial actions by demanding credible disclosures. Government too can encourage voluntary disclosure by providing special incentives to the firms. Originality/value This study is a pioneering research that investigates the mediating influence of information asymmetry between disclosure and cost of equity with reference to the Indian corporate landscape.