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Shareholder rights, financial disclosure and the cost of equity capital

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  • C. Cheng
  • Denton Collins

    ()

  • Henry Huang
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    Abstract

    This study extends research into whether shareholder rights and disclosures of financial-related attributes are associated with firms' costs of equity capital. Using cost-of-equity-capital estimates derived from expected earnings growth valuation models, we find that firms with stronger shareholder rights regimes and higher levels of financial transparency are associated with significantly lower costs of equity capital. We also find evidence that greater financial disclosure and stronger rights regimes interact in reducing firms' costs of equity capital, such that the effect of a high level of one mechanism is minimal when it is combined with a low level of the other. Finally, we document that neither factor dominates the other in their associations, and that there are tradeoffs between disclosure levels and shareholder rights in their influence on firms' implied costs of equity capital. Copyright Springer Science + Business Media, LLC 2006

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    File URL: http://hdl.handle.net/10.1007/s11156-006-8795-2
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    Bibliographic Info

    Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

    Volume (Year): 27 (2006)
    Issue (Month): 2 (September)
    Pages: 175-204

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    Handle: RePEc:kap:rqfnac:v:27:y:2006:i:2:p:175-204

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    Web page: http://springerlink.metapress.com/link.asp?id=102990

    Related research

    Keywords: Corporate governance; Shareholder rights; Disclosure; Cost of equity capital;

    References

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    1. Barry, Christopher B. & Brown, Stephen J., 1984. "Differential information and the small firm effect," Journal of Financial Economics, Elsevier, vol. 13(2), pages 283-294, June.
    2. David Easley & Maureen O'hara, 2004. "Information and the Cost of Capital," Journal of Finance, American Finance Association, vol. 59(4), pages 1553-1583, 08.
    3. Handa, Puneet & Linn, Scott C., 1993. "Arbitrage Pricing with Estimation Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(01), pages 81-100, March.
    4. Rafael La porta & Florencio Lopez-De-Silanes & Andrei Shleifer & Robert Vishny, 2002. "Investor Protection and Corporate Valuation," Journal of Finance, American Finance Association, vol. 57(3), pages 1147-1170, 06.
    5. K.J. Martijn Cremers & Vinay B. Nair, 2003. "Governance Mechanisms and Equity Prices," Yale School of Management Working Papers ysm376, Yale School of Management.
    6. Shleifer, Andrei & Vishny, Robert W, 1997. " A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-83, June.
    7. Peter Easton, 2002. "Using Forecasts of Earnings to Simultaneously Estimate Growth and the Rate of Return on Equity Investment," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 657-676, 06.
    8. Paul A. Gompers & Joy L. Ishii & Andrew Metrick, 2002. "Corporate Governance and Equity Prices," Center for Financial Institutions Working Papers 02-32, Wharton School Center for Financial Institutions, University of Pennsylvania.
    9. Palmrose, Zoe-Vonna & Richardson, Vernon J. & Scholz, Susan, 2004. "Determinants of market reactions to restatement announcements," Journal of Accounting and Economics, Elsevier, vol. 37(1), pages 59-89, February.
    10. Verrecchia, Robert E., 1983. "Discretionary disclosure," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 179-194, April.
    11. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    12. Pitelis,Christos, 2004. "Corporate Capital," Cambridge Books, Cambridge University Press, number 9780521607452, October.
    13. Verrecchia, Robert E., 2001. "Essays on disclosure," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 97-180, December.
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    Citations

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    Cited by:
    1. Michael GrĂ¼ning, 2011. "Capital Market Implications of Corporate Disclosure: German Evidence," BuR - Business Research, German Academic Association for Business Research, vol. 4(1), pages 48-72, March.
    2. Alexeev, Michael & Weber, Shlomo (ed.), 2013. "The Oxford Handbook of the Russian Economy," OUP Catalogue, Oxford University Press, number 9780199759927.
    3. Chen, Kevin C.W. & Chen, Zhihong & Wei, K.C. John, 2009. "Legal protection of investors, corporate governance, and the cost of equity capital," Journal of Corporate Finance, Elsevier, vol. 15(3), pages 273-289, June.
    4. Norio Kitagawa & Masatoshi Gotoh, 2011. "Implied Cost of Capital over the Last 20 Years," The Japanese Accounting Review, Research Institute for Economics & Business Administration, Kobe University, vol. 1, pages 71-104, December.
    5. Boujelbene, Mohamed, 2013. "The impact of intellectual capital disclosure on cost of equity capital: A case of French firms," Journal of Economics, Finance and Administrative Science, Universidad ESAN, vol. 18(34), pages 45-53.
    6. Yuan Huang & Steven Wei, 2012. "Advertising intensity, investor recognition, and implied cost of capital," Review of Quantitative Finance and Accounting, Springer, vol. 38(3), pages 275-298, April.

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