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Regulatory quality, financial integration and equity cost of capital

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  • Priya Nagaraj
  • Chuanqian Zhang

Abstract

We study the impact of international financial integration on firm‐level equity cost of capital in the presence of regulatory differences. International financial integration reduces the domestic cost of capital in the presence of well‐defined regulations that make it easier for foreign firms to overcome information asymmetry. We study this relationship for 55 countries for the period 2002 to 2014. Using multilevel mixed estimations, we find a negative relationship between cost of capital and both financial openness and regulatory quality. However, economies with better regulatory quality have a positive relationship between financial openness and cost of capital. Our results inform policy on the cost of higher level of regulations on firms’ equity cost of capital, especially when an economy has a high level of financial openness.

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  • Priya Nagaraj & Chuanqian Zhang, 2019. "Regulatory quality, financial integration and equity cost of capital," Review of International Economics, Wiley Blackwell, vol. 27(3), pages 916-935, August.
    • Handle: RePEc:bla:reviec:v:27:y:2019:i:3:p:916-935
    DOI: 10.1111/roie.12403
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    Cited by:

    1. Ahmed Saleh & Ahmed Aboud & Yasser Eliwa, 2023. "IFRS 8 and the cost of capital in Europe," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 3198-3231, July.
    2. Cordier, Mateo & Uehara, Takuro & Baztan, Juan & Jorgensen, Bethany & Yan, Huijie, 2021. "Plastic pollution and economic growth: The influence of corruption and lack of education," Ecological Economics, Elsevier, vol. 182(C).

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