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Shareholder rights, financial disclosure and the cost of equity capital

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  • C. Cheng
  • Denton Collins

    ()

  • Henry Huang

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

Suggested Citation

  • C. Cheng & Denton Collins & Henry Huang, 2006. "Shareholder rights, financial disclosure and the cost of equity capital," Review of Quantitative Finance and Accounting, Springer, vol. 27(2), pages 175-204, September.
  • Handle: RePEc:kap:rqfnac:v:27:y:2006:i:2:p:175-204
    DOI: 10.1007/s11156-006-8795-2
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Paul Brockman & Dennis Chung, 2008. "Investor protection, adverse selection, and the probability of informed trading," Review of Quantitative Finance and Accounting, Springer, vol. 30(2), pages 111-131, February.
    2. Raf Orens & Walter Aerts & Denis Cormier, 2010. "Web-Based Non-Financial Disclosure and Cost of Finance," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(9-10), pages 1057-1093, November/.
    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. 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.
    5. 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.
    6. Teresa Chu & In-Mu Haw & Bryan Lee & Woody Wu, 2014. "Cost of equity capital, control divergence, and institutions: the international evidence," Review of Quantitative Finance and Accounting, Springer, vol. 43(3), pages 483-527, October.
    7. Tim Eaton & John Nofsinger & Daniel Weaver, 2007. "Disclosure and the cost of equity in international cross-listing," Review of Quantitative Finance and Accounting, Springer, vol. 29(1), pages 1-24, July.
    8. Hua-Wei Huang & Mai Dao & James M. Fornaro, 2016. "Corporate governance, SFAS 157 and cost of equity capital: evidence from US financial institutions," Review of Quantitative Finance and Accounting, Springer, vol. 46(1), pages 141-177, January.
    9. Norio Kitagawa & Hyonok Kim & Masatoshi Goto, 2011. "The effect of non-financial risk information on the evaluation of implied cost of capitals," Discussion Papers 2011-07, Kobe University, Graduate School of Business Administration, revised Feb 2011.
    10. Ng, Anthony C. & Rezaee, Zabihollah, 2015. "Business sustainability performance and cost of equity capital," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 128-149.
    11. Jinhan Pae & Tae Choi, 2011. "Corporate Governance, Commitment to Business Ethics, and Firm Valuation: Evidence from the Korean Stock Market," Journal of Business Ethics, Springer, vol. 100(2), pages 323-348, May.
    12. Asli Ascioglu & Shantaram Hegde & Gopal Krishnan & John McDermott, 2012. "Earnings management and market liquidity," Review of Quantitative Finance and Accounting, Springer, vol. 38(2), pages 257-274, February.
    13. 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.
    14. Huang, Yu-Li & Shen, Chung-Hua, 2015. "Cross-country variations in capital structure adjustment—The role of credit ratings," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 277-294.
    15. Alexeev, Michael & Weber, Shlomo (ed.), 2013. "The Oxford Handbook of the Russian Economy," OUP Catalogue, Oxford University Press, number 9780199759927.
    16. Schauten, M.B.J. & van Dijk, D.J.C., 2010. "Corporate Governance and the Cost of Debt of Large European Firms," ERIM Report Series Research in Management ERS-2010-025-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    17. Wei Jiang & Asokan Anandarajan, 2009. "Shareholder rights, corporate governance and earnings quality: The influence of institutional investors," Managerial Auditing Journal, Emerald Group Publishing, vol. 24(8), pages 767-791, September.
    18. Hua-Wei Huang & Mai Dao & James Fornaro, 2016. "Corporate governance, SFAS 157 and cost of equity capital: evidence from US financial institutions," Review of Quantitative Finance and Accounting, Springer, vol. 46(1), pages 141-177, January.
    19. Mai Iskandar-Datta & Yonghong Jia, 2014. "Investor protection and corporate cash holdings around the world: new evidence," Review of Quantitative Finance and Accounting, Springer, vol. 43(2), pages 245-273, August.

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