INFORMATION ASYMMETRY AND COST OF CAPITAL: A REVIEW OF EMPIRICAL EVIDENCE
This paper reviewed relevant empirical studies that examined the effect of information asymmetry (IA) on corporate cost of capital (COC) over seventeen years (2007 -2023). Critical/integrative review approach was adopted and the paper found that results obtained by the reviewed studies regarding th...
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Department of Accounting and Finance, Federal University Gusau
2024-04-01
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| Series: | Gusau Journal of Accounting and Finance |
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| Online Access: | https://journals.gujaf.com.ng/index.php/gujaf/article/view/279 |
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| author | Sunusi Ridwan Ayagi Rashida Lawal |
| author_facet | Sunusi Ridwan Ayagi Rashida Lawal |
| author_sort | Sunusi Ridwan Ayagi |
| collection | DOAJ |
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This paper reviewed relevant empirical studies that examined the effect of information asymmetry (IA) on corporate cost of capital (COC) over seventeen years (2007 -2023). Critical/integrative review approach was adopted and the paper found that results obtained by the reviewed studies regarding the impact of IA on COE or WACC are in two sets: positive and negative. However, most of them have agreed and corroborated one another on the positive effect of IA on COE or WACC. And, this goes in line with the basic argument of the pecking order theory in its first proposition. Also, regarding IA and COD, the reviewed studies have agreed that IA positively affects COD. Other findings of the paper are that most of the reviewed studies were carried out in Asia, focusing on non-financial firms. Moreover, most of the studies assessed IA's effect on COE by employing Bid-ask spread and Eastos's (2004) PEG ratio models as common measures. Based on the summary of major findings, the paper concluded that corporate firms will be experiencing a rise in financing cost as long as there is an increase in asymmetric information in the capital market. The increase will affect equity financing, debt financing and overall financing costs. Thus, in line with the conclusions drawn, the paper recommended that corporate firms should strive to minimize the level of IA in the capital market through a commitment to providing high-quality financial reports that furnish the capital providers with relevant, reliable and comprehensive information.
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| format | Article |
| id | doaj-art-6042f7760aeb408d955a5ab7fda511fa |
| institution | Kabale University |
| issn | 2756-665X 2756-6897 |
| language | English |
| publishDate | 2024-04-01 |
| publisher | Department of Accounting and Finance, Federal University Gusau |
| record_format | Article |
| series | Gusau Journal of Accounting and Finance |
| spelling | doaj-art-6042f7760aeb408d955a5ab7fda511fa2025-02-12T01:06:51ZengDepartment of Accounting and Finance, Federal University GusauGusau Journal of Accounting and Finance2756-665X2756-68972024-04-015110.57233/gujaf.v5i1.06INFORMATION ASYMMETRY AND COST OF CAPITAL: A REVIEW OF EMPIRICAL EVIDENCESunusi Ridwan Ayagi0Rashida Lawal1BAYERO UNIVERSITY KANO, KANO STATE – NIGERIABAYERO UNIVERSITY KANO, KANO STATE – NIGERIA This paper reviewed relevant empirical studies that examined the effect of information asymmetry (IA) on corporate cost of capital (COC) over seventeen years (2007 -2023). Critical/integrative review approach was adopted and the paper found that results obtained by the reviewed studies regarding the impact of IA on COE or WACC are in two sets: positive and negative. However, most of them have agreed and corroborated one another on the positive effect of IA on COE or WACC. And, this goes in line with the basic argument of the pecking order theory in its first proposition. Also, regarding IA and COD, the reviewed studies have agreed that IA positively affects COD. Other findings of the paper are that most of the reviewed studies were carried out in Asia, focusing on non-financial firms. Moreover, most of the studies assessed IA's effect on COE by employing Bid-ask spread and Eastos's (2004) PEG ratio models as common measures. Based on the summary of major findings, the paper concluded that corporate firms will be experiencing a rise in financing cost as long as there is an increase in asymmetric information in the capital market. The increase will affect equity financing, debt financing and overall financing costs. Thus, in line with the conclusions drawn, the paper recommended that corporate firms should strive to minimize the level of IA in the capital market through a commitment to providing high-quality financial reports that furnish the capital providers with relevant, reliable and comprehensive information. https://journals.gujaf.com.ng/index.php/gujaf/article/view/279Information AsymmetryAdverse SelectionMoral HazardCost of EquityCost of DebtWeighted Average Cost of Capital |
| spellingShingle | Sunusi Ridwan Ayagi Rashida Lawal INFORMATION ASYMMETRY AND COST OF CAPITAL: A REVIEW OF EMPIRICAL EVIDENCE Gusau Journal of Accounting and Finance Information Asymmetry Adverse Selection Moral Hazard Cost of Equity Cost of Debt Weighted Average Cost of Capital |
| title | INFORMATION ASYMMETRY AND COST OF CAPITAL: A REVIEW OF EMPIRICAL EVIDENCE |
| title_full | INFORMATION ASYMMETRY AND COST OF CAPITAL: A REVIEW OF EMPIRICAL EVIDENCE |
| title_fullStr | INFORMATION ASYMMETRY AND COST OF CAPITAL: A REVIEW OF EMPIRICAL EVIDENCE |
| title_full_unstemmed | INFORMATION ASYMMETRY AND COST OF CAPITAL: A REVIEW OF EMPIRICAL EVIDENCE |
| title_short | INFORMATION ASYMMETRY AND COST OF CAPITAL: A REVIEW OF EMPIRICAL EVIDENCE |
| title_sort | information asymmetry and cost of capital a review of empirical evidence |
| topic | Information Asymmetry Adverse Selection Moral Hazard Cost of Equity Cost of Debt Weighted Average Cost of Capital |
| url | https://journals.gujaf.com.ng/index.php/gujaf/article/view/279 |
| work_keys_str_mv | AT sunusiridwanayagi informationasymmetryandcostofcapitalareviewofempiricalevidence AT rashidalawal informationasymmetryandcostofcapitalareviewofempiricalevidence |