Corporate finance signaling theory: an empirical analysis on the relationship between information asymmetry and the cost of equity capital

Abstract

The influence of information asymmetry (IA) on the cost of equity capital (COEC) is a critical aspect of managing corporate capital markets. This study delves into the correlation between IA and COEC through an analysis of 24 pairs of proxies. We investigate how six corporate finance signals impact the positive correlation and the consequences of disregarding each signal in establishing this positive link. The results reveal that different corporate finance signals, including dividends, debt ratio, capital expenditure, institutional ownership, ownership concentration, seasoned equity offerings (SEO), and capitalization of retained earnings (CRE), have unique effects on the relationship between the 24 pairs of IA-COEC proxies. © The Author(s), under exclusive licence to Springer Nature Limited 2024.