Firm size, disclosure and cost of equity capital

Research output: Contribution to journalArticle

11 Citations (Scopus)

Abstract

Purpose - Prior 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/approach - In 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. Findings - The 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/value - This 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.

Original languageEnglish
Pages (from-to)119-139
Number of pages21
JournalAsian Review of Accounting
Volume20
Issue number2
DOIs
Publication statusPublished - 2012

Fingerprint

Firm size
Disclosure
Cost of equity capital
Large firms
Small firms
Cost of equity
Disclosure policy
Malaysia
Economies of scale
Moderating variables
Control variable
Diamond
Costs
Capital markets
Managers
Information environment
Competitors
Design methodology
Proprietary costs

Keywords

  • Cost of equity
  • Disclosure
  • Equity capital
  • Financial accounting
  • Information asymmetry
  • Malaysia
  • Size

ASJC Scopus subject areas

  • Accounting
  • Finance

Cite this

Firm size, disclosure and cost of equity capital. / Embong, Zaini; Mohd Saleh, Norman; Hassan, Mohamat Sabri.

In: Asian Review of Accounting, Vol. 20, No. 2, 2012, p. 119-139.

Research output: Contribution to journalArticle

@article{a90ef7180dba4548aeab34b407ce48cd,
title = "Firm size, disclosure and cost of equity capital",
abstract = "Purpose - Prior 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/approach - In 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. Findings - The 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/value - This 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.",
keywords = "Cost of equity, Disclosure, Equity capital, Financial accounting, Information asymmetry, Malaysia, Size",
author = "Zaini Embong and {Mohd Saleh}, Norman and Hassan, {Mohamat Sabri}",
year = "2012",
doi = "10.1108/13217341211242178",
language = "English",
volume = "20",
pages = "119--139",
journal = "Asian Review of Accounting",
issn = "1321-7348",
publisher = "Emerald Group Publishing Ltd.",
number = "2",

}

TY - JOUR

T1 - Firm size, disclosure and cost of equity capital

AU - Embong, Zaini

AU - Mohd Saleh, Norman

AU - Hassan, Mohamat Sabri

PY - 2012

Y1 - 2012

N2 - Purpose - Prior 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/approach - In 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. Findings - The 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/value - This 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.

AB - Purpose - Prior 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/approach - In 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. Findings - The 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/value - This 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.

KW - Cost of equity

KW - Disclosure

KW - Equity capital

KW - Financial accounting

KW - Information asymmetry

KW - Malaysia

KW - Size

UR - http://www.scopus.com/inward/record.url?scp=84863847839&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84863847839&partnerID=8YFLogxK

U2 - 10.1108/13217341211242178

DO - 10.1108/13217341211242178

M3 - Article

VL - 20

SP - 119

EP - 139

JO - Asian Review of Accounting

JF - Asian Review of Accounting

SN - 1321-7348

IS - 2

ER -