The Relationship between Information Transparency and Cost of Capital

• Main Authors: Po-Shu Huang, 黃柏舒
• Other Authors: Shao-Bin Wang
• Format: Others
• Language: zh-TW
• Published: 2006
• Online Access: http://ndltd.ncl.edu.tw/handle/25348522743258059940

碩士 === 國立中興大學 === 會計學研究所 === 94 === The Relationship between Information Transparency and Cost of Capital Abstract For the past few years, the companies’ financial scandals both in foreign countries and the local firms have caused huge losses to investors. The society also bears the severe economic consequences from the companies’ fraud. The key reason to the financial fraud is a lack of information. transparency. In the U.S.A., the case of Enron and other similar cases had pushed the Parliament to pass the Sarbanes-Oxley Act of 2002, which aims to enhance the degree of firms’ information transparency. In Taiwan, the authorities also have taken notice of the importance of information transparency. For example, Securities& Futures Institute set up the “Information Disclosure Valuation System” to evaluate the information transparency of listed companies. The System assesses companies by five categories, this study, however, due to data availability, has amended the evaluation system into five categories as follows: (1) timely information transparency (2) information transparency of annual reports (3) information transparency of financial annual reports (4) information transparency of non-financial annual reports (5) total information transparency. The total scores calculated from the above are the proxies for firms’ degree of information transparency. On the other hand, the extant literature on the relation between information transparency and equity / debt cost of capital mostly indicated that the higher the information transparency, the lower the equity / debt cost of capital. Based on the above-mentioned background and the relevant literature, this study intends to investigate the relation between information transparency and cost of capital. Previous studies most commonly examine the relation between information transparency and cost of equity capital as well as information transparency and cost of debt capital respectively. This study is the first one that combines both sources of capital (WACC) to investigate how the degree of information transparency impact firms’ cost of capital? The study mainly adopts regression methodology to analyze the empirical results. The empirical results can be summarized as follows: 1. The relation between timely information transparency and cost of capital is negative. 2. The relation between annual reports and cost of capital is negative. 3. The relation between financial information in the annual reports and cost of capital is negative. 4. There is no significant relation between non-financial information in the annual reports and cost of capital. 5. The relation between total information transparency and cost of capital is negative. According to Botosan (1997), Plumlee (2002) and Sengupta (1998): when the information transparency is enhanced, the cost of capital will be decreased.. The empirical results of this study confirm their conclusions.