The Effect of Firm-specific Information Risk on the Cost of Capital, the Moderating Role of Audit Quality

Abstract

This paper investigates the link between firm-specific information and the cost of capital. We construct six hypotheses. The first three hypotheses concern how a firm’s information risk manifests itself in that firm’s cost of cap-ital, and the others concern the moderating role of audit quality on the link between the firm-specific information risk and the cost of capital. Data for the research is collected from the Vietnamese stock market in the period from 2009 to 2021 and use three proxies for the cost of capital, including the cost of equity capital, the cost of debt, and the stock returns. We apply multiple statistical econometric models to test the hypotheses and enhance the accuracy of the regression results, including the Pooled OLS (OLS) model, the Random Effects (RE), and the Fixed Effects (FE). Our main results demonstrate that all three measures of the cost of capital are negatively associated with accrual quality, which is the proxy of informational risk. This result implies that a firm with a higher level of accruals quality or a lower level of informational risk has a lower cost of capital. The outcomes for our main models also show that accruals quality manifests its influence on the cost debt and the stock return stronger under the effect of audit quality as a moderator. Firms using Big4 auditing services seem to have a better quality of accruals and lower cost of capital. The impact of audit quality on the relationship between accruals quality and the cost of equity, however, is in-significant but it is understandable in the context of the Vietnamese market.