Abstract
This study adopted the signalling theory perspective to explore the effect of information transparency on the cost of equity capital among enterprises in China. Variables of information transparency and debt ratio were used to examine their influence on the cost of equity capital of enterprises in China between 2014 and 2015. The empirical results revealed that information transparency negatively affected the cost of equity capital, regardless of examining all observations simultaneously or examining the samples from 2014 and 2015 separately. However, the effect observed in 2014 was non-significant. In addition, debt positively moderated the effect of information transparency on the cost of equity capital. The results revealed that investors of the capital market paid attention to both financial and nonfinancial information disclosed by enterprises. This finding should be of great value to enterprise managers, supervisors, and decision-makers in financial or socioeconomic systems similar to that of China. Previous relevant studies have rarely explored emergent economies in socialist systems. The empirical results of this study facilitated reinforcing the research gap regarding how enterprises in socialist countries reduce their cost of equity capital amidst the economic development therein.
Highlights
Competitions in the global business environment and demand for financial funds are becoming increasingly intensive, in particular for emerging socialist economies such as China
We determined that the mean COC value is 0.111, which is consistent with the results of studies on the international and China’s capital markets (e.g. Mangena et al, 2016; Kim et al, 2015)
This study employed the perspective of signalling theory to investigate the effect of information transparency on the cost of equity capital among enterprises in China
Summary
Competitions in the global business environment and demand for financial funds are becoming increasingly intensive, in particular for emerging socialist economies such as China. The One Belt One Road Initiative and economic reforms in China have led to the uneven distribution of financial funds (Feng, 2017), possibly allowing some enterprises to meet their cost of capital requirements in a less costly manner, while causing other enterprises to acquire such requirements at a high cost or even preventing them to achieve the required cost of capital for business operations This raises the question of whether the uneven distribution of financial funds is caused by the level of information transparency disclosed by enterprises. Enterprises with high level of information disclosure can lower the information asymmetry between managers and stakeholders to reduce the cost of equity capital. This study employed the perspective of signalling theory and relevant literature on cost of equity to construct its theoretical framework (Figure 1)
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