Abstract:
The link between disclosure of corporate information and the cost of equity
in firms is one of the most important issues in finance. This paper aims to examine
the connection between corporate governance, disclosure quality of information, and
the cost of equity in Pakistani-listed (PSX-listed) firms. Using the Generalized
Methods of Movements (Sys-GMM) model, a sample of 167 non-financial firms
listed on Pakistan Stock Exchange (PSX) for the period of 2011-2015was analyzed.
Sys-GMM estimation was applied to overcome the problem of endogeneity among
corporate governance variables. To test the robustness of GMM estimations, we
compared the results of pooled ordinary least squares (OLS) and fixed-effect
estimations and found they did not overcome the problem of endogeneity, providing
spurious results. We found a negative association between cost of equity and
disclosure quality of financial statements. The findings suggested that the board size,
concentrated ownership and CEO duality, are found as significant factors in
reducing the cost of equity of PSX-listed firms. Audit committee independence and
audit quality of the firm showed a positive relationship with the firm’s cost of equity.
Our findings suggest that employing a high-quality auditor and independent
director’s results in increased cost of equity for PSX-listed firms. Furthermore, no
significant relationship between independence of the boards and duration of the
authorizations of financial statements by the board of directors is found. The results
also revealed the investors demand more return on their investments if inadequate
and incomplete information is disclosed in the annual reports of the firms. This study
provides useful insights for Pakistani corporate governance regulators, the executive
management of Pakistani firms, and their investors.
