Moderating Effect of Voluntary Disclosure Quality on The Relationship Between Earnings Management and Cost of Capital

Abstract

Earnings management is one of the most important issues that determines the financial position of the companies. However, the method that influences the expectations of investors are the firms that need to be credible, transparent, and more informative about their activities, because when the firms' stocks have more liquid, the ability to attract investors will increase and it will obtain the necessary funds for their various activities. Therefore, this study investigates the moderating effect of voluntary disclosure quality on the relationship between earning management and cost of capital. That is, the direct relationship between earnings management and cost of capital and as well as the indirect relationship which moderated by voluntary disclosure quality. The study employed panel data analysis to an initial sample of 191 listed companies in the Amman Stock Exchange (ASE) covering 10-years period between 2010-2019. However, we sampled 99 nonfinancial listed companies on the Jordan Stock Exchange. The results of this study show that voluntary disclosure does moderate the relationship between earnings management and the cost of capital. This is because, the companies do not manage their debt profile effectively and efficient in order to improve their earnings management attractive. Low voluntary disclosure could lead to low earnings management, thus, decrease cost of capital. This study contributes to the literature by using cost of equity capital and cost of debt simultaneously and as far as the researcher's knowledge, there are no studies that had addressed this issue yet in Jordan. It is useful for Jordanian regulators and policymakers (e.g., Amman Stock Exchange (ASE), Companies Control Department).