The Moderating Role of Corporate Governance on the Relationship between Voluntary Disclosure and the Cost of Equity of the Palestinian Companies Listed on PEX
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Date
2020-10-22
Authors
Jallad, Sara
Journal Title
Journal ISSN
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Publisher
Sara Emad Hussein Jallad
Abstract
Securing financing for companies is a critical issue for their managements. Actually, the cost of equity (COE) is an important element in determining their financing source. COE may be influenced by voluntary disclosure (VD). Disclosing additional information could reduce information asymmetry and leads to lower risk and decrease the COE.
This study investigates the relationship between VD and the COE, from one hand. On the other hand, it also examines the moderating role of corporate governance (CG) on the association between VD and the COE.
Relevant measures were used in this study to achieve its objectives. Voluntary disclosure was measured by developing a checklist based on the extant literature and the prevailing circumstances in Palestine. The Capital Assets Pricing Model (CAPM) framework and the profitability ratio (ROE) were used to measure the COEC. CAPM was employed through using three models including the classical CAPM model (COE 1), Standard Deviation of return (COE 2), and Semi-
deviation of return (COE 3). Furthermore, the profitability was measured by return on equity (ROE) twice. In the first (ROE1), the classical return on equity, which is measured by dividing the net income of the firm by its total book value of equity, was used. Since ROE can have negative values but the COE can never be negative, an additional measure of the COE is used where all negative values are set to zero (ROE2). Moreover, a second checklist was also developed to measure the moderating variable (CG).
Data was obtained mainly from the annual reports prepared by the companies listed on Palestine Exchange (PEX) for ten years from 2009 to 2018. Forty-one companies listed in the PEX were considered in this study after excluding the banking sector. Financial and non-financial panel data (longitudinal data) was collected; it includes cross-sectional and time-series data.
The regression results indicate that the most significant results emerged when using CAPM- downside risk (COE 3). This can be explained as beta (COE 1) is not proper to estimate risk in emerging markets. Moreover, investors don't avoid favorable volatility (COE 2); they just avoid downside or unfavorable volatility that can be measured by the semi deviation.
Our findings highlight a negative and significant relationship between voluntary disclosure and cost of equity (COE 3), confirming the research hypothesis. The results also provide evidence when used (ROE1 and ROE2) indicates that CG moderates the associations between VD and COE since a negative and significant relationship between both variables exist only under commitment to good corporate governance mechanisms.
The study suggests a set of recommendations, including the manger should use a proper measure for cost of equity when take financing decision,.and managers must pay more attention to disclosure and, in particular, must increase the quality of voluntary disclosure through commitment to good corporate governance practice.
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The Moderating Role of Corporate Governance on the Relationship between Voluntary Disclosure and the Cost of Equity of the Palestinian Companies Listed on PEX