Cost of equity capital, control divergence, and institutions: the international evidence

This study investigates the governance role of a country’s legal and extra-legal institutions in explaining the variations in firms’ cost of equity capital induced by concentrated ownership structures from 21 countries. Using four implied cost of equity proxies, the results show that the large owner...

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Bibliographic Details
Published in:Review of quantitative finance and accounting 2014-10, Vol.43 (3), p.483-527
Main Authors: Chu, Teresa, Haw, In-Mu, Lee, Bryan Byung-Hee, Wu, Woody
Format: Article
Language:English
Subjects:
Accounting
Accounting/Auditing
Analysis
Capital costs
Corporate Finance
Corporate governance
Cost of capital
Econometrics
Economics and Finance
Enterprises
Equity
Equity capital
Finance
Institutions
International
Investments
Investors
Operations Research/Decision Theory
Original Research
Ownership
Proxies
Securities regulations
Stockholders
Studies
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Summary:This study investigates the governance role of a country’s legal and extra-legal institutions in explaining the variations in firms’ cost of equity capital induced by concentrated ownership structures from 21 countries. Using four implied cost of equity proxies, the results show that the large ownership-control divergence of the ultimate owner has a positive and significant impact on the firm’s cost of equity capital. The finding lends support to the entrenchment effect in that the concentrated ownership structure increases the firm’s external financing cost. Further analyses demonstrate that the higher equity cost induced by the ultimate ownership structure is significantly reduced by a country’s stronger legal and extra-legal institutions, highlighting the governance role played by a country’s institutions in reducing the firm’s external financing cost.
ISSN:0924-865X
1573-7179
DOI:10.1007/s11156-013-0383-7