Intra-Industry Connectedness, Large Shareholders Portfolio Diversification and Cost of Capital: The Moderating Role Of Corporate Governance

Objective: One of the important factors affecting investment is investment risk and accordingly the cost of capital imposed on companies. The effect of intra-industry information transfer is evident in internal research on the reporting environment and the quality of financial information of companies. If the information of companies in the same industry in more related industries affects the decision of investors and the quality of disclosure, it can be expected to have an effect on the reaction to the estimated profit and risk of investors and subsequently on the cost of capital. This research was conducted with the aim of investigating the effect of intra-industry connectedness and Large shareholders portfolio diversification on the cost of capital of companies and taking into account the moderating role of ownership concentration and gender diversity of the board of directors.

Methods: In order to achieve this objective, the panel data of 144 companies during the period 2013 to 2020 collected from the annual financial reports of companies listed in the Tehran Stock Exchange and multivariable regression were used and the diversity of the portfolio of major shareholders based on the method of Rhoades (1993) and Herfindahl-Hirschm index and intra-industry correlation have been measured according to the model of Chiu (2014).

Results: The results of the first and second hypothesis test respectively show a significant negative relationship between both Large Shareholders Portfolio Diversification and intra-industry Connectedness with cost of capital. Also, ownership concentration and gender diversity in the composition of the board of directors modify these relationships. The presence of a female manager in companies as a CEO or a member of the board of directors decreases effects of large shareholders portfolio diversity and intra-industry connectedness on the cost of capital. Concentration of ownership decreases effect of intra-industry connectedness on the cost of capital; but increases effect of large shareholders portfolio diversity on the cost of capital.

Conclusion: Considering that the portfolio diversity index of major shareholders is an inverse measure of portfolio diversity, the observed positive coefficient indicates less portfolio diversity. This means that the lower the diversity of the portfolio of the company's major shareholders, the higher the cost of capital, and there is a negative relationship between these two variables. Also, the results indicate the constructive effect of intra-industry Connectedness in reducing information asymmetry and creating a negative and significant relationship with the company's cost of capital. The results confirmed the moderating effect of ownership concentration and gender diversity of the board of directors on above-mentioned relationships. The presence of a female manager in companies as a CEO or a member of the board of directors decreases effects of large shareholders portfolio diversity and intra-industry connectedness on the cost of capital. Concentration of ownership decreases effect of intra-industry connectedness on the cost of capital; but increases effect of large shareholders portfolio diversity on the cost of capital.