Financial Reporting Readability and the Cost of Capital: Emphasizing the Moderating Role of Financial Reporting Quality

This research aimed to investigate the effect of financial reporting readability on the cost of capital by emphasizing the moderating role of the financial reporting quality in firms listed on the Tehran Stock Exchange. To achieve this aim of the research, hypotheses were tested using a panel data approach and logit regression. Using 1440 firm-year observations of listed firms on TSE from 2010 to 2019, investigated the nexus between the readability of financial reporting and cost of capital, where the readability of financial reporting is proxies by Fog and Flesch indexes. The results showed no significant relationship between financial reporting readability and cost of capital. While findings exhibit that financial reporting quality has an interactive effect between research variables. The results indicated that this effect could reduce the cost of capital. Additional analysis indicates that the role of the interactive effect of financial reporting quality and readability on the cost of capital is much more important among companies with high information asymmetry than companies with low information asymmetry. Furthermore, indicate no non-linear association is between the readability of financial reporting and the cost of capital. The empirical results of this research reveal that companies with high quality financial reporting have lower capital costs. In other words, the high quality of financial reporting affects the relationship between the readability of financial statements and the cost of capital. Therefore, reduce the information asymmetry between uninformed investors and management with high reporting quality. That is, higher readability reduces the risk resulting from being uninformed investors about the companies' future growth.Contribution: This research adds to the existing literature by providing empirical evidence from the test of obfuscation and signaling hypothesis and the consequences of linguistic style in emerging markets such as Iran. Also, the results of this paper require attention to the role of financial reporting quality.