The effect of corporate governance mechanism on the cost of equity capital: a test on earnings quality effect as a mediating variable

This study aims at examining the effect of corporate governance mechanism on the cost of equity capital by using earnings quality as a mediating variable. Corporate governance mechanism is a proxy comprised of independent commisioner and audit committee size. The study also utilizes intellectual capital disclosure and information asymmetry as control variables. The selected sample of this study is derived from manufacturing companies listed in Indonesia Stock Exchange in 2012 using a purporsive sampling method and judgment sampling criteria from which results in 91 companies.

Using path analysis method, this research results shows that the composition of independent commisioner and audit committee size gives a positive effect on earnings quality. However, the composition of independent commisioners and audit committee size has no direct effect to the cost of equity capital. The study reveals that the cost of equity capital level is affected by earnings quality. Furthermore, earnings quality has successfully mediated the effect of independent commisioner composition and audit committee size on the cost of equity capital. Finally, the control variable has positive impact on the cost of equity capital.