Information Asymmetry, Ownership Structure and Cost of Equity Capital: The Formation for Open Innovation
Round 1
Reviewer 1 Report
The study is very interesting and worth to be published. The paper is well structured and readable. The regression models applied are rather basic however is done properly. The results could be use to write interesting conclusions. I would add significance level to Pearson correlation (table 2) however it is not crucial from the point of view of all analysis.
Author Response
Dear reviewer,
Thank you very much for this very valuable review.
Response to Reviewer Comments
Point 1 : The study is very interesting and worth to be published. The paper is well structured and readable. The regression models applied are rather basic however is done properly. The results could be use to write interesting conclusions. I would add significance level to Pearson correlation (table 2) however it is not crucial from the point of view of all analysis.
Response : pPrson correlation as an additional analysis, so we do not focus on the results of this correlation. Should we omit this analysis?
Reviewer 2 Report
My comments on the paper - Does Asymmetric Information and Ownership Structure Increase Cost of Equity Capital? Evidence from Indonesia Panel Data - are as follows.
The research approaches a subject of great interest and actuality.
The abstract is clear, presents the purpose of the paper and the results of the research.
The author indicate the added value that the paper brings to the existing academic literature.
The references used by the author are appropriate.
The structure of the paper is coherent and the writing style has been clear.
The whole content of the paper has a logical flow, while the concluding remarks are in full concordance with the approached subject. The research methodology used by the author is adequate for the approached subject.
The author undertakes an excellent analysis and synthesis of the academic literature.
The discussions and the conclusions are significant.
In the section “Conclusion”, the author does not mention the limits of the research. We consider that the author can show the limitations of the analysis carried out in his paper.
Author Response
Dear reviewer
Thank you very much for your valuable suggestions and reviews for improving our article
Point 1: In the section “Conclusion”, the author does not mention the limits of the research. We consider that the author can show the limitations of the analysis carried out in his paper.
Response 1: we've added to the article
Our study has some limitations. First, in line with the research objectives, we only used observations in the local context, i.e. Indonesia. Future studies can expand their research objectives by using cross-country data, so as to expand the study and make comparisons between countries. Second, from the time dimension, we only collected data from 2016 to 2019. For further studies, we suggest collecting data with a longer time dimension, so that it can expand and deepen the study.
Best regards,
imam muslim & doddy setiawan
Reviewer 3 Report
It is a good job. In my opinion, it doesn't need any major changes.
Author Response
thank you for the review. I will make sure this article is free from writing errors again
Reviewer 4 Report
Referee report on “Does Asymmetric Information and Ownership Structure Increase Cost of Equity Capital? Evidence from Indonesia Panel Data”.
The paper formulates and tests some hypotheses related to the effect of information asymmetry and ownership structures on the cost of equity. Empirical support is found for some hypothesis. I believe that the topic of the paper is interesting and important and most of the results are quite intuitive so after some improvements the paper can be published.
- Overall, I think the paper is technically sound and uses an appropriate econometric technique and hence the statistical part of the paper is solid.
- My comments are mostly related to the strength of the paper’s contribution and its connection to existing literature.
2.1. The paper is about cost of capital, ownership structure and information asymmetry and it deals or is related to several important (I believe) topics in these areas: 1) connections between information asymmetry and firm capital structure and cost of capital; 2) connections between ownership structure firm capital structure and cost of capital. However, a review of the theoretical articles related to these areas is absent and furthermore they are not even mentioned. Even though the paper is empirical, good papers (either theoretical or empirical) always provide a review of both types of papers related to their topic of study. The reasons for this are that different types of readers may be interested in reading the paper and more importantly it helps to better evaluate the merits of the paper’s contribution. So with regard to the first topic mentioned above we know for example that the pecking-order theory predicts that a firm shares will be underpriced when the firm issues equity due to asymmetric information between firm insiders and outsiders. This implies a lower share price and a higher cost of equity for firms issuing equity under asymmetric information. This effect will be even stronger if the extent of asymmetric information increases etc. Same ideas can be found in other theoretical papers or can be directly deducted from them. So a better review of these theories is expected (eg Harris and Raviv (1991), Miglo (2011), Myers and Majluff (1984), Leland and Pyle (1977), Halov and Heider (2011), Jensen and Meckling (1976) etc.). The same is true for the second area. The paper should better explain its connections to the theoretical literature on the links between ownership structure and the cost of capital.
2.2 The innovative element of the paper should be explained much better. Many of the questions analyzed in the paper have already been analyzed and many similar results have been obtained previously. For example, for the positive effect of asymmetric information on cost of equity see Nuryaman (2014). In fact, most of the hypotheses should be better justified in light of existing previously published research/knowledge/results. So the authors should make more of an effort to explain the importance of their contribution. Otherwise it is just an obvious consequence of previous results. Also as I noticed above they can better relate their article to theoretical literature which may perhaps help them find a new hypothesis that will be interesting from a theoretical point of view. Overall, I think most of the hypotheses could remain as is under the condition that their contribution is better explained. But I also think a new hypothesis should be developed that way the reader will have no questions about the degree of novelty and “surprise” of the paper.
Minor comments
Some sentences are not clear. See abstract: One of the important findings, the rate of return and information asymmetry, can especially be used as valuable input in considering the investment.
Also Our study aims to investigate whether information asymmetry and ownership structures will increase the cost of equity capital.
Note that ownership structure exists in any company so it is not aproper way to say that ownership strtucre will increase or decrease the cost equity. A proper way to say is for example that alrger institutional fraction of equity will increase/decrease the cost of equity.
Author Response
Dear reviewer,
Thank you very much for this very valuable review.
Response to Reviewer Comments
Point 1: The paper is about cost of capital, ownership structure and information asymmetry and it deals or is related to several important (I believe) topics in these areas: 1) connections between information asymmetry and firm capital structure and cost of capital; 2) connections between ownership structure firm capital structure and cost of capital. However, a review of the theoretical articles related to these areas is absent and furthermore they are not even mentioned. Even though the paper is empirical, good papers (either theoretical or empirical) always provide a review of both types of papers related to their topic of study. The reasons for this are that different types of readers may be interested in reading the paper and more importantly it helps to better evaluate the merits of the paper’s contribution. So with regard to the first topic mentioned above we know for example that the pecking-order theory predicts that a firm shares will be underpriced when the firm issues equity due to asymmetric information between firm insiders and outsiders. This implies a lower share price and a higher cost of equity for firms issuing equity under asymmetric information. This effect will be even stronger if the extent of asymmetric information increases etc. Same ideas can be found in other theoretical papers or can be directly deducted from them. So a better review of these theories is expected (eg Harris and Raviv (1991), Miglo (2011), Myers and Majluff (1984), Leland and Pyle (1977), Halov and Heider (2011), Jensen and Meckling (1976) etc.). The same is true for the second area. The paper should better explain its connections to the theoretical literature on the links between ownership structure and the cost of capital.
Response 1: we’ve added to the article
2.2. Pecking Order Theory
The second theory we chose to explain the relationship between information asymmetry and the cost of equity capital is the Pecking Order Theory. Pecking Order Theory was popularized by [57]. The postulation of this theory is that the cost of financing will increase with increasing information asymmetry. Information asymmetry arises when companies issue sources of funding in the form of equity (share issuance). At the time of this share issuance, investors perceive managers to have more information about the company and value shares higher than the value of the company, and managers take advantage of that valuation. Therefore, investors will underestimate the price of the shares issued. In other words, high information asymmetry and low stock prices imply a high cost of equity capital.
Point 2: The innovative element of the paper should be explained much better. Many of the questions analyzed in the paper have already been analyzed and many similar results have been obtained previously. For example, for the positive effect of asymmetric information on cost of equity see Nuryaman (2014). In fact, most of the hypotheses should be better justified in light of existing previously published research/knowledge/results. So the authors should make more of an effort to explain the importance of their contribution. Otherwise it is just an obvious consequence of previous results. Also as I noticed above they can better relate their article to theoretical literature which may perhaps help them find a new hypothesis that will be interesting from a theoretical point of view. Overall, I think most of the hypotheses could remain as is under the condition that their contribution is better explained. But I also think a new hypothesis should be developed that way the reader will have no questions about the degree of novelty and “surprise” of the paper.
Response 2: we’ve added to the article
Our results provide paramount empirical implications. First, in an effort to address the problem of information asymmetry and the high cost of equity capital in the Indonesian and perhaps global capital markets, we recommend using a tit-for-tat approach. The tit-for-tat approach is based on retaliation, good is rewarded with kindness, and bad is rewarded with malignance. In the context of agency problems, when the company's performance is poor, the principal as an investor will punish the agent in the form of selling shares. Conversely, when the company's performance is good, the principal as an investor will give an award in the form of buying shares or holding them from being sold. Through this tit-for-tat approach, agency problems between the principal and the agent will be minimized because the agent will maintain their performance.
Second, the company must determine the trade-off in its capital structure. The trade-off balances the selection of sources of capital from debt and equity. The high level of choice of sources of capital from debt will risk bankruptcy. Likewise, choosing a source of capital from equity will increase the cost of equity capital. It is important in this case that the company determines the trade-off between debt and equity in a balanced manner
Point 3: Some sentences are not clear. See abstract: One of the important findings, the rate of return and information asymmetry, can especially be used as valuable input in considering the investment.
Response 3: we’ve elimitaned it
Point 4: Also Our study aims to investigate whether information asymmetry and ownership structures will increase the cost of equity capital.
Note that ownership structure exists in any company so it is not aproper way to say that ownership structure will increase or decrease the cost of equity. A proper way to say is for example that alrger institutional fraction of equity will increase/decrease the cost of equity.
Response 4: do we have to revise the title too? because the title also includes the ownership structure
Again, we are very grateful for this review.
Best regards,
Imam Muslim & Doddy setiawan
Round 2
Reviewer 4 Report
Referee report on “Does Asymmetric Information and Ownership Structure Increase Cost of Equity Capital? Evidence from Indonesia Panel Data” (resubmission).
The authors have made some changes to the paper compared to initial submission. I believe that the paper can be published with some minor improvements.
- A review of the theoretical articles related to the paper topics should still be significantly improved. Especially in the areas like links between asymmetric information and capital structure (and respectively the cost of capital), agency costs and capital structure, ownership structure and capital structure. Try to better align your structure of theories with existing literature. Use similar terminology etc. Many important theories have not been even mentioned while some ideas which do not seem to be major ideas are analyzed in details (in addition to the literature I mentioned last time see eg Becht, Bolton, and Roell (2003) for a review related to the connections between ownership structure on firm’s financing etc.; in general you need to go even further than that). So I still expect a significant improvement in this part of your work.
- The innovative element of the paper should still be explained much better. Starting with the abstract. What is your major (new) finding compared to existing literature. Focus on this and develop it deeper.
- Yes, the title should be changed as well taking into account my previous comments. Eg How do asymmetry of information and ownership structure affect the cost of equity? Smth. like this.
- English and typos should be strongly checked throughout.
Eg Line 92. Literatur …misspelled etc.
Author Response
Dear reviewer,
thank you for a very meaningful review of our article. We are trying to fulfill these reviews
Response to Reviewer 1 Comments
Point 1: A review of the theoretical articles related to the paper topics should still be significantly improved. Especially in the areas like links between asymmetric information and capital structure (and respectively the cost of capital), agency costs and capital structure, ownership structure and capital structure. Try to better align your structure of theories with existing literature. Use similar terminology etc. Many important theories have not been even mentioned while some ideas which do not seem to be major ideas are analyzed in details (in addition to the literature I mentioned last time see eg Becht, Bolton, and Roell (2003) for a review related to the connections between ownership structure on firm’s financing etc.; in general you need to go even further than that). So I still expect a significant improvement in this part of your work.
Response 1: we’ve add to the article
This discussion is paramount to see how companies choose their capital structure in relation to the condition of information asymmetry and cost of equity capital. [60] investigated companies in the United States of America in determining their capital structure. The result found that companies will avoid issuing debt securities if the market knows little information about the company. In other words, if there is information asymmetry in the capital market, companies tend to delay the issuance of debt securities. In line with the pecking order theory [57], if a company chooses to issue stock securities in conditions of high information asymmetry, it will ultimately decrease stock prices and increase the cost of equity capital.
Point 2: The innovative element of the paper should still be explained much better. Starting with the abstract. What is your major (new) finding compared to existing literature. Focus on this and develop it deeper.
Response 2: we’ve add to the article
Abstract: Our study aims to investigate how information asymmetry and ownership structure affect cost of equity capital. For that purpose, we collected 246 issuers over 4 years for a total of 984 observations. By using panel data processing, we found that the information asymmetry we proxied through Price non-Synchronization and trading volume had an effect on the cost of equity capital. Our results also confirmed both Agency Theory and Pecking Order Theory. Both theories are in line with the conditions of the stock market in Indonesia. In addition, we found that institutional and foreign ownership structures also had an effect on the cost of equity capital. Furthermore, our results also confirmed Interest Alignment Theory and Entrenchment Theory. Our research is expected to contribute to the debate on the existence of information asymmetry and ownership structures in relation to the cost of equity capital. We also hope that it will be a valuable input for investors in considering their investment. Moreover, from the results of this study, investors can also consider foreign ownership or institutional ownership in determining their investment. In addition, stock market regulators in Indonesia can develop approaches to minimize information asymmetry and encourage foreign investors to invest in Indonesia.
Agency theory assumes that information asymmetry arises from information gap between principals and agents. This information gap occurs because one party has more information than the other party. Investors can act as principals and company management as agents. When the principal or agent has more information, information asymmetry will arise. Regarding information asymmetry, pecking order theory also assumes that a company that focuses on the capital structure of share issuance will have a high level of information asymmetry, and further drive the high cost of equity capital.
Our results indicate that the conditions of the Indonesian capital market are in line with both the agency theory and the pecking order theory. The high level of information asymmetry and low protection of investors have boosted the high cost of equity capital in Indonesia. In addition, Indonesia is also noted to have a high cost of equity capital compared to other ASEAN countries (see [59]).
Our results also confirm the second and fourth hypotheses that we proposed, where institutional ownership and foreign ownership have an effect on the cost of equity capital. Our results prove that public ownership has no effect on the cost of equity capital. Our results also prove that we stand between the two theories we support, Entrenchment Theory and Interest Alignment Theory.
Entrenchment Theory assumes that ownership structure can increase the cost of equity capital, while Interest Alignment Theory assumes that ownership structure can reduce the cost of equity capital. In the contexts of Indonesia, the ownership structure consists of family, institutional, foreign, or public ownership. The stock market conditions in Indonesia support both theories. For the Indonesian stock market, the presence of foreign ownership can reduce the cost of equity capital. Unfortunately, foreign ownership in Indonesia has not been dominant. Only certain companies have foreign ownership structures (e.g. Astra International, Nippon Indosari Corpindo). In addition, the conditions of the Indonesian stock market also prove that the institutional ownership structure or blockholders will actually increase the cost of equity capital. The presence of this ownership can create conflicts between shareholders. This conflict will create high monitoring costs and ultimately increase the cost of equity capital. Unfortunately, blockholder ownership of more than 5% in Indonesia is found in almost all companies listed on the Indonesia Stock Exchange. This condition is what we identify as an indicator of the high cost of equity capital in Indonesia compared to other ASEAN countries.
Point 3: Yes, the title should be changed as well taking into account my previous comments. Eg How do asymmetry of information and ownership structure affect the cost of equity? Smth. like this.
Response 2: we’ve add to the article
How do Information Asymmetry and ownership structure affect cost of equity capital? Evidence from Indonesia Panel Data
Point 4: English and typos should be strongly checked throughout.
Eg Line 92. Literatur …misspelled etc.
Response 2: we’ve correct it
- Literature Review
once again, we are very grateful
Author Response File: 
Author Response.pdf
