The Relation between Excess Control and Cost of Capital Under Different Law Regimes

36 Pages Posted: 24 Oct 2010

See all articles by Claude Laurin

Claude Laurin

HEC Montreal - Department of Accounting Studies

Yves Bozec

HEC Montreal

Iwan Meier

HEC Montreal - Department of Finance

Date Written: October 21, 2010

Abstract

Prior empirical work examined the relationship between dominant shareholders, whose voting rights exceed cash flow rights, and firm value. In this study, we adopt a different perspective and argue that because of the risk imposed on minority shareholders and debtors, such excess control likely increases firms’ weighted-average cost of capital. We further argue that in legal environments that provide weak investor protection, the firms’ cost of capital is likely to be higher. Using panel data of 155 Canadian firms over a four-year period from 2002 to 2005, we find supporting evidence.

Keywords: corporate governance, cost of capital, excess control, ownership, dominant shareholders, agency costs

JEL Classification: G34

Suggested Citation

Laurin, Claude and Bozec, Yves and Meier, Iwan, The Relation between Excess Control and Cost of Capital Under Different Law Regimes (October 21, 2010). Available at SSRN: https://ssrn.com/abstract=1695735 or http://dx.doi.org/10.2139/ssrn.1695735

Claude Laurin

HEC Montreal - Department of Accounting Studies ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal H3T 2A7, Quebec
Canada
514-340-6536 (Phone)
514-340-5633 (Fax)

Yves Bozec (Contact Author)

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Iwan Meier

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7 H2J 2K9
Canada
(514) 340-3198 (Phone)

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