Information Asymmetry as a Mediating Factor on the Relationship Between Earnings Quality and Equity Cost

Abstract

Businesses must grow to thrive and stay competitive in the face of escalating competition. This expansion entails growing the business, innovating new products, and differentiating existing ones, all of which eventually result in a greater demand for funding. As a result, businesses need third parties, like creditors or investors, who can provide cash. This study aims to investigate the relationship between the cost of equity and the quality of earnings, as well as the effect of asymmetric information as an intervening variable. Discretionary accruals are used to quantify the quality of earnings; they are computed using the Modified Jones Model. In the meantime, bid-ask spreads and price-earning ratios are used to measure asymmetric information and the cost of stock. The main theoretical framework for this research is agency theory. Twenty companies from the consumer products manufacturing industry were chosen for the research sample using purposive sampling in the years 2020–2022. Path analysis is the research method used in this study to explain the linkages that exist both directly and indirectly between the cost of equity, asymmetric knowledge, and the quality of earnings. It is clear from the path analysis results that the cost of equity is not directly impacted by the quality of earnings. Additionally, the testing of the second hypothesis shows that, in the absence of asymmetric information acting as an intervening variable, the quality of earnings has no indirect impact on the cost of stock.