Excess Control, Corporate Governance, and Implied Cost of Equity: International Evidence

Abstract

We investigate whether the separation between ownership and control rights can be costly to controlling shareholders and firms in terms of capital-raising costs. Using estimates of the cost of equity capital implied by analyst earnings forecasts and growth rate for a sample of 1,207 firms from nine Asian and 13 Western European countries, we find strong, robust evidence that the cost of equity is increasing in excess control, while controlling for other firm-level characteristics. This core finding persists after controlling for legal institutions variables.

Keywords: Ownership, Control, Expropriation, Corporate Governance, Cost of Equity

JEL Classification: G12, G32, G34, G38, G30