The cost of capital is defined as the minimum rate of return which the company must obtain so that the shareholders' wealth, not decrease. The information asymmetry among firms, shareholders and creditors can increase the cost of capital. One way to reduce information asymmetry and consequently reduce the cost of capital is to improve the quality of financial reporting and the disclosure quality. This object is mentioned in previous researches, but it should be noted that the financial reporting quality and disclosure quality are affected by other variables. This can cause the endogenity bias in the regression model and report the unreliable results. However, the possibility of this problem is not considered in previous internal researches. To overcome the endogenity bias, this paper study the relationship among financial reporting quality, disclosure quality and the cost of capital, using instrumental variable and the generalized method of moments (GMM) estimator in 124 firms listed in Tehran Stock Exchange during 2003 to 2015. The research findings confirm the endogenity bias and the results of using instrumental variable demonstrate a significant negative relationship between financial reporting quality, disclosure quality and the cost of capital.
Aflatooni A, amirbakhtiarvand A. The Effect of Financial Reporting Qualityand Disclosure Quality on the Cost of Capital: Instrumental Variable Approach. fa 2016; 8 (31) :30-50 URL: http://qfaj.mobarakeh.iau.ir/article-1-900-en.html