Voluntary disclosure-cost of equity nexus and the moderating role of corporate governance: evidence from an extremely politically unstable context

Muiz Abu Alia, Islam Abdeljawad, Sara Emad Jallad and Mamunur Rashid

International Journal of Islamic and Middle Eastern Finance and Management, 2022, vol. 15, issue 6, 1035-1052

Abstract: Purpose - Higher degree of and commitment to voluntary disclosure (VD) and corporate governance (CG) helps contain information asymmetry, leading to lower cost of equity (Ke). This study provides evidence on the nexus among VD, CG, and Ke from a context characterized by extreme political instability. Design/methodology/approach - This study uses all non-bank companies listed with the Palestine Exchange during 2009–2018. The level of VD was estimated by using a checklist of 35 items modified for the context of Palestine. A second checklist with 19 items was used to measure the commitment of the Palestinian companies with CG requirements. Five proxies for Ke were tested: three ex-ante Capital Asset Pricing Model-like proxies and two ex-post realized return proxies. Findings - The findings state that the VD negatively impacted Ke. Interaction effect of CG and VD helps reduce the Ke. As such, for firms with better CG, the increase in VD decreases the Ke more than their standalone effect. For control variables, leverage, size and growth of firms exhibited positive impacts on Ke, whereas quality of auditors found a negative connection. Practical implications - Managers in similar context, like Palestine, may prefer flexibility of smaller size and adopt conservative growth strategies to cope with adverse events. Firms adopt CG and VD as complementary forces to tackle instability and market expectation. Originality/value - Studies connecting VD-CG-Ke nexus from similar context are rare. Results of this study forward that emphasis on disclosure and governance practices will help boost the confidence of the investors, reduce the Ke and create an incentive for more investment.

Keywords: Corporate governance; Voluntary disclosure; Cost of equity; Political instability; Palestine exchange (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:imefmp:imefm-02-2021-0069

DOI: 10.1108/IMEFM-02-2021-0069

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