Agency Costs of Free Cash Flow and the Effect of Shareholder Rights on the Implied Cost of Equity Capital
Kevin C. W. Chen
Hong Kong University of Science and Technology
City University of Hong Kong
K. C. John Wei
Hong Kong University of Science & Technology (HKUST) - Department of Finance
April 9, 2009
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
In this paper, we examine the effect of shareholder rights on reducing the cost of equity and the impact of agency problems from free cash flow on this effect. We find that firms with strong shareholder rights have a significantly lower implied cost of equity after controlling for risk factors, price momentum, analysts' forecast biases, and industry effects than do firms with weak shareholder rights. Further analysis shows that the effect of shareholder rights on reducing the cost of equity is significantly stronger for firms with more severe agency problems from free cash flows.
Number of Pages in PDF File: 69
Keywords: Agency costs of free cash flow, Anti-takeover provisions, Shareholder rights, Cost of equity capital, Investment opportunities
JEL Classification: G34Accepted Paper Series
Date posted: April 9, 2009
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