Saeed Fathi - Associate Professor, Department of Management, Faculty of Administrative Sciences and Economics, University of Isfahan, Isfahan, Iran Corresponding Author
Fatemeh Dehghani Poodeh - MSc Department of Management, Faculty of Administrative Sciences and Economics, University of Isfahan, Isfahan, Iran
Ahmad Googerdchian - Assistant Professor in Economics Department, Faculty of Administrative Sciences and Economics, University of Isfahan, Isfahan, Iran

Information asymmetry in stock market can increase the risk of investment which in turn increases the capital cost of firms. Bhattacharya (۱۹۷۹) proposed a hypothesis that states dividend can act as a powerful signal in order to solve information asymmetry problem. We measured information asymmetry by lack of earnings transparency. Therefore we examine the effect of earnings transparency on capital cost in two portfolios; the first with high dividend and the second with low dividend to test the above hypothesis. The results indicate that earnings transparency can only increase market component of expected return. In other words in the portfolio with low dividend signal there is a negative relation between earnings transparency and expected return (meaning that information asymmetry has not been solved). On the other hands in the portfolio with high dividend, the earnings transparency has no negative effect on capital cost; meaning that dividend signal solved information asymmetry problem

Earnings Transparency, Capital Cost, Capital Cost Components