International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter?
ECGI - Law Working Paper No. 15/2003
Rodney L. White Center for Financial Research Working Paper No. 17-04
65 Pages Posted: 21 Dec 2004
There are 2 versions of this paper
International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter?
International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter?
Date Written: December 2005
Abstract
This paper examines international differences in firms' cost of equity capital across 40 countries. We analyze whether the effectiveness of a country's legal institutions and securities regulation is systematically related to cross-country differences in the cost of equity capital. We employ several models to estimate firms' implied or ex ante cost of capital. Our results support the conclusion that firms from countries with more extensive disclosure requirements, stronger securities regulation and stricter enforcement mechanisms have a significantly lower cost of capital. We perform extensive sensitivity analyses to assess the potentially confounding influence of countries' long-run growth differences on our results. We also show that, consistent with theory, the cost of capital effects of strong legal institutions become substantially smaller and, in many cases, statistically insignificant as capital markets become globally more integrated.
Keywords: Cost of equity, Disclosure regulation, Law and finance, International finance, Country risk, Legal system
JEL Classification: G14, G15, G31, G38, G30, K22, M41
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Christine Botosan and Marlene Plumlee
-
By Christine Botosan and Marlene Plumlee
-
By Paul M. Healy and Krishna Palepu
-
Information and the Cost of Capital
By Maureen O'hara and David Easley
-
Toward an Implied Cost of Capital
By William R. Gebhardt, Charles M.c. Lee, ...
-
Toward an Ex Ante Cost-of-Capital
By William R. Gebhardt, Charles M.c. Lee, ...
-
The World Price of Insider Trading
By Utpal Bhattacharya and Hazem Daouk
-
The Market Pricing of Earnings Quality
By Jennifer Francis, Ryan Lafond, ...