Conflict of Interest between Labor and Controlling Shareholders: International Evidence from the Cost of Equity Capital

41 Pages Posted: 17 Aug 2011

See all articles by In-Mu Haw

In-Mu Haw

Texas Christian University - M.J. Neeley School of Business

Teresa Chu

University of Macau, Department of Accounting

Xu Zhang

University of Macau

Date Written: August 16, 2011

Abstract

In this study, we examine international differences in firms’ cost of equity capital around the world. Specifically, we investigate whether the effectiveness of labor protection regulations is systematically related to firms’ cost of equity capital and how the presence of controlling shareholders affects the relationship between labor protection institutions and the cost of equity. Our analysis exploits cross-sectional variations in labor market regulations, employment laws, and social security laws. Both firm- and country-level analyses reveal that firms in countries where labor rights are well protected have a significantly higher equity cost, after controlling for investor protection environments and firm- and country-level risk factors. However, the positive effect of labor regulations on the equity cost is significantly mitigated in the presence of controlling shareholders, especially in the case of a family controlling owner. The economic magnitude of such effect is substantial: a one-unit increase in labor market regulation index increases the annual cost of equity by 0.713% in widely held firms, while it increases by only 0.352% in firms with controlling shareholders. Our evidence sheds light on the role of labor regulations in shaping the corporate governance structure and the conflict of interest between employees and controlling shareholders.

Keywords: labor regulations, cost of equity capital, controlling shareholders, conflict of interest, cross-country study

JEL Classification: G32, G38, K31

Suggested Citation

Haw, In-Mu and Chu, Teresa and Zhang, Xu, Conflict of Interest between Labor and Controlling Shareholders: International Evidence from the Cost of Equity Capital (August 16, 2011). 24th Australasian Finance and Banking Conference 2011 Paper, Available at SSRN: https://ssrn.com/abstract=1911007 or http://dx.doi.org/10.2139/ssrn.1911007

In-Mu Haw (Contact Author)

Texas Christian University - M.J. Neeley School of Business ( email )

Fort Worth, TX 76129
United States
817-921-7563 (Phone)
817-921-7227 (Fax)

Teresa Chu

University of Macau, Department of Accounting ( email )

P.O. Box 3001
Macau

Xu Zhang

University of Macau ( email )

Macau

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