Investigating the Impact of Information Asymmetry on Cost of Capital

Abstract

The impact of asymmetric information on cost of capital is issue that many researches have resulted in financial literature. This study examines the impact of information asymmetry on cost of capital of the firms listed in Tehran Stock Exchange. For this reason, we investigate 4 different criteria of cost of capital including cost of equity capital, capital cost of retained earnings, capital cost of liability and weighted average cost of capital. The study sample includes 94 companies listed in Tehran stock exchange for a period of 7 years (2005-2012). We used panel data simple and multiple analyses to examine the Hypothesis. Based on the results we find that there are significant relationship between Information Asymmetry and two criteria of cost of capital (cost of equity capital and capital cost of liability). But there aren’t any significant relationship between Information Asymmetry and other two criteria (weighted average cost of capital and cost of retained earnings). Given the above results, it can be stated that the operational definition of cost of capital is affecting on the presence or absence of the relationship with information asymmetry