Legal Protection of Investors, Corporate Governance, and the Cost of Equity Capital

47 Pages Posted: 9 Apr 2009

See all articles by Kevin C. W. Chen

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 Polytechnic University

Date Written: January 2, 2009

Abstract

This study examines the effect of firm-level corporate governance on the cost of equity capital in emerging markets and how the effect is influenced by country-level legal protection of investors. We find that firm-level corporate governance has a significantly negative effect on the cost of equity capital in these markets. In addition, this corporate governance effect is more pronounced in countries that provide relatively poor legal protection. Thus, in emerging markets, firm-level corporate governance and country-level shareholder protection seem to be substitutes for each other in reducing the cost of equity. Our results are consistent with the finding from McKinsey's surveys that institutional investors are willing to pay a higher premium for shares in firms with good corporate governance, especially when the firms are in countries where the legal protection of investors is weak.

Keywords: governance, Cost of equity, Legal protection of investors

JEL Classification: F30, G30, G34

Suggested Citation

Chen, Kevin C.W. and Chen, Zhihong and Wei, Kuo-Chiang (John), Legal Protection of Investors, Corporate Governance, and the Cost of Equity Capital (January 2, 2009). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1375410

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 (John) Wei (Contact Author)

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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