The Impact of Managerial Ability on Cost of Capital: Is There a Mediation Role for Accounting Information Risk? An Empirical Study

Purpose: This research aims to investigate the mediating role of accounting information risk (private information risk, information transparency risk and information quality "or accuracy" of accounting information risk) in explaining the direct impact of mangerial ability on cost of capital from its sources (cost of equity and/or cost of debts), whether in total or separately.
Design/methodology: This research uses a time series of archival data, by running Stata (V.17) and applying Path Analysis methodology, using a purposive sample of (121) companies from non-financial companies traded on the Egyptian Stock Exchange, during the period from 2008 to 2022.
Results: In general, the results indicate that, the increase in managerial ability will reduce the cost of capital, especially, cost of equity. However, the direct effect of managerial ability on cost of debts is not significant. Also, results show a mediating role of private information risk in transferring the negative effect of managerial ability on cost of capital from its sources (cost of equity and/or cost of debts), whether in total or separately. The results also show a mediating role of information transparency risk in transferring the negative effect of managerial ability on cost of capital from both sources together, especially, cost of equity only, with the exception of cost of debts, thus, significance of mediating role of information transparency risk is not proven for cost of debts. Finally, the research does not find clear scientific evidence on the mediating role of information quality (or accuracy) risk of accounting information in explaining the direct impact of managerial ability on cost of capital - despite using different proxies.
Originality/ Value: For the best knowledge of the researcher, the current paper is one of the first that applied in the Egyptian environment, which focuses on provide empirical evidence, on the mediating role of types of accounting information risk in explaining the direct impact of managerial ability on cost of capital from its sources (cost of equity and/or cost of debts), whether totally or separetally, especially during periods of instability experienced by the Egyptian environment; the global financial crisis in 2008, the two revolutions of January 25, 2011 and June 30, 2013, the (Covid-19) pandemic in 2020 and floatation of the local currency in 2022, in a way that may expose companies to financing distress which can limit their ability to implement their investment projects, which may turn the Egyptian environment to become a fertile environment for discovering the effect of managers abilities to reduce cost of capital directly and/or indirectly through mediating accounting information risk.