Influence of information asymmetry on the cost of equity capital in companies admitted to Tehran Stock Exchange

doi:10.21203/rs.3.rs-4936247/v1

The purpose of this research is to investigate the effect of information asymmetry on capital structure and capital cost of companies accepted in Tehran Stock Exchange. For this purpose, four different criteria of cost of capital, including the cost of capital (WACC) stock, the cost of capital accumulated profits, the cost of debt and the average cost of capital, were analyzed. The statistical population of this study consisted of 94 companies from 20 different industrial groups that showed a significant relationship between information asymmetry and two criteria for the cost of capital stock and debt expenses in the period of 2004–2014 using combined data. But between information asymmetry and the other two criteria, the accumulated profit cost and the rationale for the cost of capital are not significant. Therefore, it can be said that the operational definition of cost of capital affects the existence or non-existence of the mentioned relationship.

information asymmetry

cost of equity capital

capital cost of accumulated profits

cost of debt and averaged cost of capital

Financing companies effectively is a critical challenge in capital markets. Information asymmetry, where unequal access to information creates market inefficiencies, can lead to adverse selection and moral hazard, thereby destabilizing financial markets. Investor groups often access varying quality and amounts of information, resulting in diverse behaviors within each group, sometimes leading to herd behavior. This phenomenon can render financial systems fragile and prone to imbalance. Understanding the impact of information asymmetry is crucial for maintaining market stability and ensuring efficient capital allocation.

The cost of capital is a key factor in many financial and managerial decisions, influenced by factors such as financial leverage, profitability, ownership structure, company size, and liquidity (Nasir pour, 2000). Given the importance of attracting capital and financing in today's competitive market, the existence of an active capital market is essential for national economic growth.

Decisions to buy or sell shares are often based on the latest information about companies in the market. When information asymmetry exists, it can lead to incorrect market analyses, discouraging small investors from participating and increasing the cost of capital for companies (Lambert et al., 2006). Studies by O'Hara (2003) and Easley & O'Hara (2004) have shown that information asymmetry affects asset prices and is a key determinant of the cost of capital. Asymmetry among traders can lead to a decrease in asset prices, increased trading costs, and reduced liquidity, ultimately raising the cost of capital.

This study aims to investigate the relationship between information asymmetry and the cost of capital for companies listed on the Tehran Stock Exchange, focusing on four hypotheses regarding equity capital, debt costs, retained earnings, and WACC.

The statistical population of this research consists of companies listed on the Tehran Stock Exchange from 2004 to 2014. Companies were selected based on the following criteria: their financial year ends in March, they are not investment companies or banks, and their financial information is available for the entire period under review. A total of 94 companies met these criteria and were included in the sample.

Data for this research were obtained from actual stock market figures and financial statements. The study employed a library research method and analyzed the data using panel data techniques, integrating spatial observations over several periods. Correlation and regression analyses were used to test the research hypotheses. The hypotheses were tested using Stata 9 and Eviews 7 software.

In order to analyze the data, descriptive statistics of the variables are presented in Table 1:

Table 1

Descriptive statistics of research variables
Variable name	Number	Average	Standard deviation
Information asymmetry	658	0.0188	0.01288
Cost of ordinary stock capital	658	2523520	6318916
Accumulated interest expense	658	19658542	1.54E + 08
Debt expense	658	0.0844	1.3240
Average cost of capital	658	2.06E + 20	1.64 E + 21
Financial Leverage	658	0.6184	0.1770
Size	658	1317780	6679741
Growth	658	0.073892	0.1974

Table 2

Results of model selection for each of the four hypotheses:
Hypothesis	Test	Test statistic	Significance	Selected model
The first hypothesis	Chow test	5.499	0.0001	Fixed model
The first hypothesis	Hausman test	32.32	0.0001	Fixed model
The second hypothesis	Chow test	1.207	0.037	Fixed model
The second hypothesis	Hausman test	22.412	0.0002	Fixed model
The third hypothesis	Java test	3.805	0.0001	Fixed model
The third hypothesis	Hausman test	349.508	0.0001	Fixed model
Fourth hypothesis	Chow test	1.428	0.0085	Fixed model
Fourth hypothesis	Hausman test	42.65	0.0001	Fixed model

According to the results presented in Table 2, for the four hypotheses the fixed effect model is selected.

In clauses 3, 4, 5, and 6, the results of estimating the least squares regular regression model with fixed effects method are presented for four hypotheses, respectively.

Table 3

Results of testing the first hypothesis using the fixed model (dependent variable cost of equity capital)
The first hypothesis	Variables	Coefficients	Standard error	Statistic t	Meaningful
Information asymmetry	β₁	-39468321	17630013	-2.2387	− .025
Financial Leverage	β₂	14980603	2200420	6.808	0.001
Size	β₃	-0.026	0.094	-0.274	0.783
Growth	β₄	-1527942	1112691	-1.373	0.170
Constant	c	-5851837	1409533	-4.151	0.0001
Weighting statistics	F statistics	Meaningful F	Camera-Watson	The coefficient of determination	Adjusted coefficient of determination
Weighting statistics	5.371	0.0000	1.65	0.481	0.392

Table 4

The results of testing the second hypothesis using the fixed model (dependent variable of accumulated profit cost)
The first hypothesis	Variables	Coefficients	Standard error	Statistic t	Meaningful
Information asymmetry	β₁	-6.20e + 08	5.20e + 08	-1.192	0.233
Financial Leverage	β₂	93266183	64910741	1.43	0.15
Size	β₃	14.90	2.79	5.34	0.0001
Growth	β₄	-72129821	32823563	-2.197	0.028
Constant	c	-40675184	41580184	-0.978	0.328
Weighting statistics	F statistics	Meaningful F	Camera-Watson	The coefficient of determination	Adjusted coefficient of determination
Weighting statistics	1.821	0.0000	1.608	0.239	0.108

Table 5

The results of testing the third hypothesis using the fixed model (dependent variable of debt cost)
The first hypothesis	Variables	Coefficients	Standard error	Statistic t	Meaningful
Information asymmetry	β₁	7.315	3.066	2.385	0.017
Financial Leverage	β₂	-1.159	0.382	-3.030	0.002
Size	β₃	3.75e + 07	1.65e + 08	22.817	0.0001
Growth	β₄	-1.54	0.193	-7.98	0.0001
Constant	c	0.28	0.245	1.156	0.247
Weighting statistics	F statistics	Meaningful F	Camera-Watson	The coefficient of determination	Adjusted coefficient of determination
Weighting statistics	10.39	0.0000	2.12	0.64	0.58

Table 6

Results of testing the fourth hypothesis using a randomized model (dependent variable of the average cost of capital)
The first hypothesis	Variables	Coefficients	Standard error	Statistic t	Meaningful
Information asymmetry	β₁	-6.67e + 21	3.92e + 25	-1.56	0.11
Financial Leverage	β₂	3.76e + 20	5.32e + 20	0.707	0.479
Size	β₃	2.29e + 13	1.859	1.859	0.063
Growth	β₄	8.82e + 20	2.69e + 20	3.076	0.0022
Constant	c	1.82e + 19	3.41e + 20	-0.0533	0.9575
Weighting statistics	F statistics	Meaningful F	Camera-Watson	The coefficient of determination	Adjusted coefficient of determination
Weighting statistics	7.038	0.0001	1.678	0.549	0.47

Table 1: provides descriptive statistics for the variables used in the study. The findings for each of the four hypotheses are presented in Tables 2 to 6. The results indicate that the fixed-effects model was selected for all four hypotheses based on the significance of the Chow and Hausman tests.

Table 3: The first hypothesis, which examines the relationship between information asymmetry and the cost of equity capital, shows a significant negative relationship (coefficient = -39468321, p = 0.025). This suggests that higher information asymmetry leads to a lower cost of equity capital, potentially due to reduced investor confidence.

Table 4: The second hypothesis, concerning the cost of retained earnings, shows no significant relationship with information asymmetry (p = 0.233). This could be due to the internal nature of this financing method, which may be less influenced by external information asymmetry.

Table 5: The third hypothesis finds a significant positive relationship between information asymmetry and debt costs (coefficient = 7.315, p = 0.017). This indicates that higher information asymmetry increases debt costs, likely due to lenders demanding higher returns to compensate for the risk of insufficient information.

Table 6: The fourth hypothesis, examining the relationship between information asymmetry and WACC, finds no significant relationship (p = 0.11). This suggests that while information asymmetry impacts specific components of capital cost, its overall effect on WACC may be less pronounced.

The study was to investigate the effect of information asymmetry on capital cost of companies accepted in Tehran Stock Exchange. In fact, information asymmetry could lead to a reduction in stock liquidity and an increase in transaction costs, and this raises the cost of capital for companies.

In this research, the information asymmetry as independent variable, the cost of capital ordinary stock, the cost of debt, the cost of capital accumulated profits and the rational capital cost of capital as dependent variables are analyzed. The relationship between these variables in terms of financial leverage, company size and Growth was controlled and examined in four hypotheses. The results obtained from the first and third hypotheses of this study are based on the results of Lambert, Leo and Verchia (2006), Sainney and Herman (2010), Armstrong, Core, Taylor and Verchia (2010) and Peng Hee Lepton, Lane (2013). The lack of a meaningful relationship between information asymmetry and the cost of capital associated with accumulated profits can be attributed to the internal nature of this financing method. In other words, the cost of equity capital and the cost of equity capital of a company's debt are directly affected by the expectations of shareholders and creditors, but may have less effect on the cost of capital generated by the company's accumulated profits.

Author Contribution

Author involved in this study. field works, data analysis and interpretation of the data were undertaken by the author Saeed Askari Nia

Hejazi, R., & Jalali, F. (2007). Investigating Factors Affecting Capital Cost in Companies Listed on the Tehran Stock Exchange. Journal of Humanities and Social Sciences Economic Sciences, 24, 13–30.
Nasirpour, M. (2000). Investigating the Size of the Company on the Capital Cost of Companies Listed on the Tehran Stock Exchange. Master's Degree in Accounting, Shahid Beheshti University.
Amihud, Y., & Mendelson, H. (1986). Asset Pricing and the Bid-Ask Spread. Journal of Financial Economics, 17, 223–249.
Armstrong, C. S., Core, J. E., Taylor, D. J., Robert, E., & Verrecchia (2010). When Does Information Asymmetry Affect the Cost of Capital? http://www.ssrn.com
Bollen, N., & Smith, and Whaley (2004). Modeling the Bid-Ask Spread: Measuring the Inventory-Holding Premium. Journal of Financial Economics, 32, 159–163.
Easley, D., & O'Hara, M. (1992). Time and the Process of Security Price Adjustment. The Journal of Accounting Research, 47(2), 577–605.
Lambert, R. A., Leuz, C., & Verrecchia, R. E. (2006). Information Asymmetry, Information Precision, and the Cost of Capital. http://www.ssrn.com
O'Hara, M. (2003). Presidential Address: Liquidity and Price Discovery. Journal of Finance, 58, 1335–1354.
He, P., Lepone, W., & Henry Leung. (2013). Information Asymmetry and the Cost of Equity Capital. International Review of Economics & Finance, 27, 611–620.
Saini, J. S., & Don Herrmann. (2010). and. Cost of Equity Capital, Information Asymmetry, and Segment Disclosure. http://www.ssrn.com

No competing interests reported.

Influence of information asymmetry on the cost of equity capital in companies admitted to Tehran Stock Exchange

Status:

Version 1

Abstract

Introduction:

Methodology:

Findings:

Results:

Conclusion:

Declarations

Author Contribution

References

Additional Declarations

Status:

Version 1