Abstract

http://ssrn.com/abstract=2370644
 


 



Property Theft and the Cost of Equity Capital


James Brushwood


University of Arizona

Dan S. Dhaliwal


University of Arizona - Department of Accounting

Douglas J. Fairhurst


University of Arizona - Eller College of Management

Matthew A. Serfling


University of Arizona - Department of Finance

December 20, 2013


Abstract:     
We study how a large and overlooked source of business risk that costs firms and investors billions of dollars annually — the risk of property theft — impacts a firm’s cost of equity capital. We hypothesize that a firm with a greater exposure to the risk of property theft has higher cash flow risk and lower expected cash flows, which results in a higher cost of equity. To test this hypothesis, we exploit variation in state-level property crime rates as a source of changes in a firm’s exposure to the risk of property theft. Consistent with our hypothesis, we find that a firm located in an area with a higher property crime rate has a higher cost of equity, especially when individuals have greater incentives and opportunities to steal from the firm. Additional analyses help rule out the alternative explanation that omitted variables related to overall criminal activity, local economic conditions, and characteristics of local labor markets drive our findings. Lastly, we provide evidence that a firm located in a more crime ridden area also has a higher cost of bank debt. Overall, our paper shows that a firm’s exposure to the risk of property theft can have an economically important impact on its financing costs.

Number of Pages in PDF File: 55

Keywords: Cost of equity, Theft, Crime, Business risk

JEL Classification: G12, M41

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Date posted: December 22, 2013  

Suggested Citation

Brushwood, James and Dhaliwal, Dan S. and Fairhurst, Douglas J. and Serfling, Matthew A., Property Theft and the Cost of Equity Capital (December 20, 2013). Available at SSRN: http://ssrn.com/abstract=2370644 or http://dx.doi.org/10.2139/ssrn.2370644

Contact Information

James Brushwood
University of Arizona ( email )
Tucson, AZ 85721
United States
Dan S. Dhaliwal
University of Arizona - Department of Accounting ( email )
McClelland Hall
PO Box 210108
Tucson, AZ 85721
United States
Douglas J. Fairhurst
University of Arizona - Eller College of Management ( email )
McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
Matthew A. Serfling (Contact Author)
University of Arizona - Department of Finance ( email )
McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
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