Internal Control Quality, Disclosure and Cost of Equity Capital: The Case of an Unregulated Market

28 Pages Posted: 28 Oct 2017

See all articles by Hichem Khlif

Hichem Khlif

University of Monastir - EAS - FSEG Mahdia, Université de Monastir

Khaled Samaha

American University in Cairo

Mark T. Soliman

University of Southern California - Marshall School of Business

Date Written: October 26, 2017

Abstract

This paper examines the direct effect of internal control quality (ICQ) on cost of equity capital and whether the former has a moderating effect on the association between voluntary disclosure and cost of equity capital in an emerging market (Egypt). ICQ is measured using a survey of external auditors. A content analysis approach is used to proxy for the level of voluntary disclosure in annual. Finally, the Capital Asset Pricing Model (CAPM) framework is used to estimate cost of equity capital. Based on a sample of 256 firm-year observations over the period of 2007-2010, we find that ICQ is negatively and significantly associated with cost of equity capital indicating that better controls reduce cost of capital. In addition, ICQ moderates the association between voluntary disclosure and cost of equity capital since this association is only negative and significant for companies characterized by high ICQ. Our study contributes to the internal control literature by focusing on an emergent unregulated market with respect to internal control disclosure and documents that ICQ plays an important role in reducing cost of equity capital (either directly or indirectly) by increasing the value relevance of voluntary disclosure among investors on the Egyptian stock exchange.

Keywords: Cost of equity capital, ICQ, Voluntary disclosure, Egypt

JEL Classification: M41

Suggested Citation

Khlif, Hichem and Samaha, Khaled and Soliman, Mark T., Internal Control Quality, Disclosure and Cost of Equity Capital: The Case of an Unregulated Market (October 26, 2017). Available at SSRN: https://ssrn.com/abstract=3059702 or http://dx.doi.org/10.2139/ssrn.3059702

Hichem Khlif (Contact Author)

University of Monastir - EAS - FSEG Mahdia, Université de Monastir ( email )

Al-Ain
Tunisia

Khaled Samaha

American University in Cairo ( email )

P.O. Box 2511
Cairo
Egypt

Mark T. Soliman

University of Southern California - Marshall School of Business ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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