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.
Theoretically, accounting conservatism and voluntary disclosure may be used as means to reduce cost of equity. Supportive evidence has been provided by the majority of studies, especially in developed countries. We address this issue by focusing on an underdeveloped country with political instability. The impact of accounting conservatism and voluntary disclosure on cost of capital is estimated using the data belongs to all companies listed on the Palestine Exchange during the period from 2015 to 2019. The results confirm the negative influence of voluntary disclosure and accounting conservatism on cost of capital.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.