Firm size, disclosure and cost of equity capital

Abstract

PurposePrior studies argue that larger firms could get more net benefit from higher disclosure compared to smaller firms due to economies of scale (lower relative costs to produce) and lower proprietary cost (risk of information disclosed being used by competitor). However, this has not been empirically tested. Thus, the purpose of this study is to provide a formal test on whether larger firms benefit more from higher disclosure compared to the smaller firms.Design/methodology/approachIn prior studies, size is included as a control variable because it has been found to influence cost of equity capital. However, this study treats firm size as a moderating variable to the relationship between disclosure and cost of equity capital. The sample comprises 460 firms listed under the Main Board of Bursa Malaysia.FindingsThe result shows that there is a significant negative relationship between disclosure and cost of equity capital for large firms and not significant for small firms. The managers of firms could strategize the firm's disclosure policy by taking into consideration that the benefit of disclosure in reducing the cost of equity may depend on the size of the firms.Originality/valueThis is the first study that investigates the effect of size on the disclosure and cost of equity relationship. Thus, the evidence can support Diamond and Verrecchia's argument that larger firms benefit more from their disclosure policy compared to smaller firms. The nature of the information environment in the Malaysian capital market as well as legal background in Malaysia provides the authors with enough variations in disclosure and cost of equity to investigate this issue.