Reputation-Based Disclosure and Cost of Capital: The Role of Controlling Ownership
Abstract
This study aims at examining the effect of reputation-based disclosure on the cost of capital and the role of the controlling ownership as a moderating variable. The sample of the study consists of manufacturing firms listed on the Indonesia Stock Exchange (IDX) for the years 2009–2013. This study uses price-earnings to growth (PEG) as a proxy of the cost of capital. The result demonstrates that reputation-based voluntary disclosure has a negative effect on the cost of capital. The controlling ownership further strengthened this effect. The cost of capital is reduced by higher disclosure. However, the interaction between reputation-based disclosure and ownership structure has a positive effect on the cost of capital. The result of this study is robust, using other measurements of the cost of capital (Fama-French model). It implies that investors can utilize firms’ disclosure as a signal to estimate returns. Firms, however, strive to impress investors positively to reduce the expected returns.
References
Abeysekera, I. (2019). How best to communicate intangible resources on websites to inform corporate‐growth reputation of small entrepreneurial businesses. Journal of Small Business Management, 57(3), 738-756. https://doi.org/10.1111/jsbm.12320
Armitage, S., & Marston, C. (2008). Corporate disclosure, cost of capital and reputation: Evidence from finance directors. The British Accounting Review, 40(4), 314-336. https://doi.org/10.1016/j.bar.2008.06.003
Baginski, S. P., & Rakow, K. C. (2012). Management earnings forecast disclosure policy and the cost of equity capital. Review of Accounting Studies, 17(2), 279-321. https://doi.org/10.1007/s11142-011-9173-4
Bertomeu, J., & Cheynel, E. (2016). Disclosure and the cost of capital: A survey of the theoretical literature. Abacus, 52(2), 221-258. https://doi.org/10.1111/abac.12076
Bhattacharya, N., Ecker, F., Olsson, P. M., & Schipper, K. (2011). Direct and mediated associations among earnings quality, information asymmetry, and the cost of equity. The Accounting Review, 87(2), 449-482. https://doi.org/10.2308/accr-10200
Blanco, B., Garcia Lara, J. M., & Tribo, J. A. (2015). Segment disclosure and cost of capital. Journal of Business Finance & Accounting, 42(3-4), 367-411. https://doi.org/10.1111/jbfa.12106
Botosan, C. A., & Plumlee, M. A. (2002). A Re-examination of disclosure level and the expected cost of equity capital. 40(1), 21-40. https://doi.org/10.1111/1475-679X.00037
Boubakri, N., Guedhami, O., & Mishra, D. (2010). Family control and the implied cost of equity: Evidence before and after the Asian financial crisis. Journal of International Business Studies, 41(3), 451-474. https://doi.org/10.1057/jibs.2009.77
Brahmana, R. K., Setiawan, D., & Hooy, C. W. (2019). Controlling shareholders and the effect of diversification on firm value: evidence from Indonesian listed firms. Journal of Asia Business Studies, 13(3), 362-383. https://doi.org/10.1108/JABS-12-2016-0165
Bravo, F. (2016). Forward-looking disclosure and corporate reputation as mechanisms to reduce stock return volatility. Revista de Contabilidad, 19(1), 122-131. https://doi.org/10.1016/j.rcsar.2015.03.001
Byun, H.-Y., Choi, S., Hwang, L.-S., & Kim, R. G. (2013). Business group affiliation, ownership structure, and the cost of debt. Journal of Corporate Finance, 23, 311-331 https://doi.org/10.1016/j.jcorpfin.2013.09.003
Cao, Y., Myers, J. N., Myers, L. A., & Omer, T. C. (2015). Company reputation and the cost of equity capital. Review of Accounting Studies, 20(1), 42-81. https://doi.org/10.1007/s11142-014-9292-9
Carney, R. W., & Child, T. B. (2013). Changes to the ownership and control of East Asian corporations between 1996 and 2008: The primacy of politics. Journal of Financial Economics, 107(2), 494-513. https://doi.org/10.1016/j.jfineco.2012.08.013
Chavent, M., Ding, Y., Fu, L., Stolowy, H., & Wang, H. (2006). Disclosure and determinants studies: An extension using the Divisive Clustering Method (DIV). European Accounting Review, 15(2), 181-218. https://doi.org/10.1080/09638180500253092
Chen, C.-C., & Otubanjo, O. (2013). A functional perspective to the meaning of corporate reputation. The Marketing Review, 13(4), 329-345. https://doi.org/10.1362/146934713X13832199716741
Cheynel, E. (2013). A theory of voluntary disclosure and cost of capital. Review of Accounting Studies, 18(4), 987-1020. https://doi.org/10.1007/s11142-013-9223-1
Chun, R. (2005). Corporate reputation: Meaning and measurement. International Journal of Management Reviews, 7(2), 91-109. https://doi.org/10.1111/j.1468-2370.2005.00109.x
Claessens, S., Djankov, S., & Lang, L. H. P. (2000). The separation of ownership and control in East Asian corporations. Journal of Financial Economics, 58(1-2), 81-112. https://doi.org/10.1016/S0304-405X(00)00067-2
Core, J. E., Hail, L., & Verdi, R. S. (2015). Mandatory disclosure quality, inside ownership, and cost of capital. European Accounting Review, 24(1), 1-29. https://doi.org/10.1080/09638180.2014.985691
Diamond, D. W., & Verrecchia, R. E. (1991). Disclosure, liquidity, and the cost of capital. Journal of Finance, 46(4), 1325-1359. https://doi.org/10.1111/j.1540-6261.1991.tb04620.x
Eaton, T. V., Nofsinger, J. R., & Weaver, D. G. (2007). Disclosure and the cost of equity in international cross-listing. Review of Quantitative Finance and Accounting, 29(1), 1-24. https://doi.org/10.1007/s11156-007-0024-0
Francis, J. R., Khurana, I. K., & Pereira, R. (2005). Disclosure incentives and effects on cost of capital around the world. The Accounting Review, 80(4), 1125-1162. https://doi.org/10.2308/accr.2005.80.4.1125
Gatzert, N. (2015). The impact of corporate reputation and reputation damaging events on financial performance: Empirical evidence from the literature. European Management Journal, 33(6), 485-499. https://doi.org/10.1016/j.emj.2015.10.001
Guedhami, O., & Mishra, D. (2009). Excess control, corporate governance and implied cost of equity: International evidence. Financial Review, 44(4), 489-524. https://doi.org/10.1111/j.1540-6288.2009.00227.x
Guidara, A., Khlif, H., & Jarboui, A. (2014). Voluntary and timely disclosure and the cost of debt: South African evidence. Meditari Accountancy Research, 22(2), 149-164. https://doi.org/10.1108/MEDAR-09-2013-0042
Hassan, O. A. G., & Marston, C. (2019). Corporate financial disclosure measurement in the empirical accounting literature: A review article. The International Journal of Accounting, 54(2), 1950006. https://doi.org/10.1142/S1094406019500069
Houston, M. B. (2003). Alliance partner reputation as a signal to the market: Evidence from bank loan alliances. Corporate Reputation Review, 5(4), 330-342. https://doi.org/10.1057/palgrave.crr.1540182
Kim, J. W., & Shi, Y. (2011). Voluntary disclosure and the cost of equity capital: Evidence from management earnings forecasts. Journal of Accounting and Public Policy, 30(4), 348-366. https://doi.org/10.1016/j.jaccpubpol.2011.03.001
Kristandl, G., & Bontis, N. (2007). The impact of voluntary disclosure on cost of equity capital estimates in a temporal setting. Journal of Intellectual Capital, 8(4), 577-594. https://doi.org/10.1108/14691930710830765
La Porta, R., Lopez-De-Silanes, F., & Shleifer, A. (1999). Corporate ownership around the world. The Journal of Finance, 54(2), 471-517. https://doi.org/10.1111/0022-1082.00115
Lang, M. H., & Lundholm, R. J. (1996). Corporate Disclosure Policy and Analyst Behavior. The Accounting Review, 71(4), 467-492.
Lin, C., Ma, Y., Malatesta, P., & Xuan, Y. (2011). Ownership structure and the cost of corporate borrowing. Journal of Financial Economics, 100(1), 1-23. https://doi.org/10.1016/j.jfineco.2010.10.012
Lopes, A. B., & de Alencar, R. C. (2010). Disclosure and cost of equity capital in emerging markets: The Brazilian case. The International Journal of Accounting, 45(4), 443-464. https://doi.org/10.1016/j.intacc.2010.09.003
Pfister, B., & Schwaiger, M. (2016). Assessing the Impact of Corporate Reputation on Firms' Cost of Debt: An Empirical Study of German DAX 30 Companies. Paper presented at the Marketing Challenges in a Turbulent Business Environment, Cham. https://doi.org/10.1007/978-3-319-19428-8_15
Richardson, A. J., & Welker, M. (2001). Social disclosure, financial disclosure and the cost of equity capital. Accounting, Organizations and Society, 26(7), 597-616. https://doi.org/10.1016/S0361-3682(01)00025-3
Setiawan, D., Aryani, Y. A., Yuniarti, S., & Brahmana, R. K. (2019). Does Ownership Structure Affect Dividend Decisions? Evidence from Indonesia's Banking Industry. International Journal of Business, 24(3), 330-344.
Setiawan, D., Bandi, B., Phua, L. K., & Trinugroho, I. (2016). Ownership structure and dividend policy in Indonesia. Journal of Asia Business Studies, 10(3), 230-252. https://doi.org/10.1108/JABS-05-2015-0053
Setiawan, D., Md Taib, F., Phua, L. K., & Chee, H. K. (2019). IFRS and earnings management in Indonesia: The efect of independent commissioners. International Journal of Business and Society, 20(1), 37-58.
Siregar, S. V., & Utama, S. (2008). Type of earnings management and the effect of ownership structure, firm size, and corporate-governance practices: Evidence from Indonesia. The International Journal of Accounting, 43(1), 1-27. https://doi.org/10.1016/j.intacc.2008.01.001
Suprianto, E., Rahmawati, R., Setiawan, D., & Aryani, Y. A. (2019). Controlling generation of family firms and earnings management in Indonesia: The role of accounting experts of audit committees. Journal of International Studies, 12(3), 265-276. https://doi.org/10.14254/2071-8330.2019/12-3/21
Weigelt, K., & Camerer, C. (1988). Reputation and corporate strategy: A review of recent theory and applications. 9(5), 443-454. https://doi.org/10.1002/smj.4250090505
Copyright (c) 2022 Doddy Setiawan
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
Copyright Transfer Statement for Journal
1) In signing this statement, the author(s) grant UNIMAS Publisher an exclusive license to publish their original research papers. The author(s) also grant UNIMAS Publisher permission to reproduce, recreate, translate, extract or summarize, and to distribute and display in any forms, formats, and media. The author(s) can reuse their papers in their future printed work without first requiring permission from UNIMAS Publisher, provided that the author(s) acknowledge and reference publication in the Journal.
2) For open access articles, the author(s) agree that their articles published under UNIMAS Publisher are distributed under the terms of the CC-BY-NC-SA (Creative Commons Attribution-Non Commercial-Share Alike 4.0 International License) which permits unrestricted use, distribution, and reproduction in any medium, for non-commercial purposes, provided the original work of the author(s) is properly cited.
3) For subscription articles, the author(s) agree that UNIMAS Publisher holds copyright, or an exclusive license to publish. Readers or users may view, download, print, and copy the content, for academic purposes, subject to the following conditions of use: (a) any reuse of materials is subject to permission from UNIMAS Publisher; (b) archived materials may only be used for academic research; (c) archived materials may not be used for commercial purposes, which include but not limited to monetary compensation by means of sale, resale, license, transfer of copyright, loan, etc.; and (d) archived materials may not be re-published in any part, either in print or online.
4) The author(s) is/are responsible to ensure his or her or their submitted work is original and does not infringe any existing copyright, trademark, patent, statutory right, or propriety right of others. Corresponding author(s) has (have) obtained permission from all co-authors prior to submission to the journal. Upon submission of the manuscript, the author(s) agree that no similar work has been or will be submitted or published elsewhere in any language. If submitted manuscript includes materials from others, the authors have obtained the permission from the copyright owners.
5) In signing this statement, the author(s) declare(s) that the researches in which they have conducted are in compliance with the current laws of the respective country and UNIMAS Journal Publication Ethics Policy. Any experimentation or research involving human or the use of animal samples must obtain approval from Human or Animal Ethics Committee in their respective institutions. The author(s) agree and understand that UNIMAS Publisher is not responsible for any compensational claims or failure caused by the author(s) in fulfilling the above-mentioned requirements. The author(s) must accept the responsibility for releasing their materials upon request by Chief Editor or UNIMAS Publisher.
6) The author(s) should have participated sufficiently in the work and ensured the appropriateness of the content of the article. The author(s) should also agree that he or she has no commercial attachments (e.g. patent or license arrangement, equity interest, consultancies, etc.) that might pose any conflict of interest with the submitted manuscript. The author(s) also agree to make any relevant materials and data available upon request by the editor or UNIMAS Publisher.
