Effects of the Stock Exchange Competitive Level on Information Asymmetry and Cost of Capital

Information is distributed asymmetrically among investors in financial markets. In such a situation, investors increase their expected returns to cover risks. Therefore, the risk of reported information and asymmetric distribution of information will be an effective factor on the expected returns of shareholders or the cost of capital. Accordingly, the purpose of this study is to investigate the effect of asymmetry information on the cost of capital in two different competition levels in Tehran Stock Exchange. The sample consists of 145 firms listed in Tehran Stock Exchange during the period from 2011 to 2016. In order to test the research hypotheses, the data panel regression analysis is performed using a compilation method. Findings of the research show that information asymmetry has a positive effect on cost of capital, based on all three criteria for measuring information asymmetry. In other words, with increasing information asymmetry, the cost of equity is also rising. The results also show that market competition level has a significant effect on the relationship between information asymmetry and equity costs. In other words, at the level of incomplete market competition, the positive effect of information asymmetry on the cost of capital is strengthened, while at the full competition level, the positive effect of information asymmetry on the cost of capital is weakened.