CORPORATE RISK DISCLOSURE AND COST OF EQUITY CAPITAL: MODERATING ROLE OF FIRM PERFORMANCE
Abstract
Investors can use Corporate Risk Disclosure to guide them in assessing a company. Indicators of Corporate Risk Disclosure, based on IFRS 7, include 45 items with the following requirements: (a) General Risk Information; (b) Accounting Policies; (c) Financial Instrument; (d) Derivative hedging; (e) Reserve; and (f) Financial and Other Risks. The current study aims to assess and analyze the impact of Corporate Risk Disclosure on Cost of Equity Capital and to determine whether Firm Performance moderates the relationship between Corporate Risk Disclosure and Cost of Equity Capital. It uses a sample of 86 manufacturing companies listed in Indonesia Stock Exchange in the period 2017-2019. The results indicated that Corporate Risk Disclosure negatively affects Cost of Equity Capital. More risk items disclosed means higher market liquidity as demand for securities is increasing and thereby lowering the cost of equity capital. Firm performance has been shown to strengthen the impact of Corporate Risk Disclosure on Cost of Equity. Underperforming companies tend to disclose more risk information than their well-performing counterparts and the latter, thereby, will have lower cost of equity capital.
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