Abstract

http://ssrn.com/abstract=1375436
 
 

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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

Zhihong Chen


Hong Kong University of Science and Technology

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

Abstract:     
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: G34

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Date posted: April 9, 2009  

Suggested Citation

Chen, Kevin C. W. and Chen, Zhihong and Wei, K. C. John, Agency Costs of Free Cash Flow and the Effect of Shareholder Rights on the Implied Cost of Equity Capital (April 9, 2009). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: http://ssrn.com/abstract=1375436

Contact Information

Kevin C.W. Chen
Hong Kong University of Science and Technology ( email )
Clear Water Bay
Kowloon
Hong Kong
+852 2358-7585 (Phone)
+852 2358-1693 (Fax)
Zhihong Chen
Hong Kong University of Science and Technology ( email )
Clear Water Bay
Kowloon
Hong Kong
Hong Kong
(852)-2358-7574 (Phone)
(852)-2358-1693 (Fax)
Kuo-Chiang Wei (Contact Author)
Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )
Clear Water Bay, Kowloon
Hong Kong
852 358 7676 (Phone)
852 358 1749 (Fax)
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