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http://ssrn.com/abstract=639681
 
 

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Corporate Governance and the Cost of Equity Capital


Hollis Ashbaugh Skaife


Graduate School of Management, UC-Davis; University of Wisconsin, Madison - Department of Accounting and Information Systems

Daniel W. Collins


University of Iowa - Department of Accounting

Ryan LaFond


BlackRock

December 2004


Abstract:     
Separation of ownership and control in firms creates information asymmetry problems between shareholders and managers that expose shareholders to a variety of agency risks. This paper investigates the extent to which governance attributes that are intended to mitigate agency risk affect firms' cost of equity capital. We examine governance attributes along four dimensions: (1) financial information quality, (2) ownership structure, (3) shareholder rights, and (4) board structure. We find that firms reporting larger abnormal accruals and less transparent earnings have a higher cost of equity, whereas firms with more independent audit committees have a lower cost of equity. We also find that firms with a greater proportion of their shares held by activist institutions receive a lower cost of equity, whereas firms with more blockholders have a higher cost of equity. Moreover, we find a negative relation between the cost of equity and the independence of the board and the percentage of the board that owns stock. Collectively, the governance attributes we examine explain roughly 8% of the cross-sectional variation in firms' cost of capital and 14 % of the variation in firms' beta. The results support the general hypothesis that firms with better governance present less agency risk to shareholders resulting in lower cost of equity capital.

Number of Pages in PDF File: 54

JEL Classification: G34, G12, G32, M41, M49

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Date posted: February 3, 2005  

Suggested Citation

Skaife, Hollis Ashbaugh and Collins, Daniel W. and LaFond, Ryan, Corporate Governance and the Cost of Equity Capital (December 2004). Available at SSRN: http://ssrn.com/abstract=639681 or http://dx.doi.org/10.2139/ssrn.639681

Contact Information

Hollis Ashbaugh Skaife
Graduate School of Management, UC-Davis ( email )
Graduate School of Management
1 Shields Ave
Davis, CA 95616
United States
University of Wisconsin, Madison - Department of Accounting and Information Systems ( email )
School of Business
975 University Avenue
Madison, WI 53706
United States
608-263-7979 (Phone)
608-263-0477 (Fax)
Daniel W. Collins (Contact Author)
University of Iowa - Department of Accounting ( email )
108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0912 (Phone)
319-335-1956 (Fax)
Ryan LaFond
BlackRock ( email )
400 Howard Street
San Francisco, CA 94105
United States
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