Geographic Location, Foreign Ownership, and Cost of Equity Capital: Evidence from Privatization

52 Pages Posted: 13 Feb 2016

See all articles by Narjess Boubakri

Narjess Boubakri

American University of Sharjah - School of Business and Management; HEC Montreal - Department of Finance

Omrane Guedhami

University of South Carolina - Moore School of Business

Walid Saffar

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: February 11, 2016

Abstract

Motivated by recent research on the link between geographic proximity and information risk, we examine the impact of geographic location on a firm’s ownership structure and cost of equity capital using a large sample of newly privatized firms from 47 countries. We find that the greater the firm’s distance from domestic financial centers, the lower foreign investors’ participation and ownership. We also find that strong country-level institutions governing investor protection reduce the information disadvantage of foreign investors. In additional analyses, we find that investors require higher cost of equity capital for distant privatized firms, especially in countries with weak governance institutions. We conclude that geographic location is an important determinant of post-privatization ownership structure and cost of equity capital. Our results are robust to alternative explanations and suggest that improving country-level governance institutions can mitigate the adverse effect of location in remote areas.

Keywords: Privatization, geographic location, ownership structure

JEL Classification: G32, G34

Suggested Citation

Boubakri, Narjess and Guedhami, Omrane and Saffar, Walid, Geographic Location, Foreign Ownership, and Cost of Equity Capital: Evidence from Privatization (February 11, 2016). Available at SSRN: https://ssrn.com/abstract=2731460 or http://dx.doi.org/10.2139/ssrn.2731460

Narjess Boubakri

American University of Sharjah - School of Business and Management ( email )

P.O. Box 26666
Sharjah
United Arab Emirates

HOME PAGE: http://www.aus.edu

HEC Montreal - Department of Finance ( email )

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

Omrane Guedhami

University of South Carolina - Moore School of Business ( email )

Columbia, SC
United States

Walid Saffar (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Li Ka Shing Tower
Hong Hum
Kowloon
Hong Kong

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