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Disclosure, Corporate Governance, and the Cost of Equity Capital: Evidence from Asia's Emerging Markets

44 Pages Posted: 3 Aug 2003  

Kevin C. W. Chen

Hong Kong University of Science and Technology

K.C. John Wei

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Zhihong Chen

Hong Kong University of Science and Technology

Date Written: June 2003

Abstract

This paper examines the effects of disclosure and other corporate governance mechanisms on the cost of equity capital in Asia's emerging markets with newly released surveys from Credit Lyonnais Securities Asia (CLSA). We find that both disclosure and non-disclosure corporate governance mechanisms have a significantly negative effect on the cost of equity capital. In addition, the effect of non-disclosure governance mechanisms is more profound than that of disclosure on the cost of equity capital. Specifically, after controlling for beta and size, when a firm improves its aggregate non-disclosure corporate governance ranking from the 25th percentile to the 75th percentile, its cost of equity capital is reduced roughly by 1.26 percentage points, while the corresponding reduction in the cost of equity capital for the same improvement in disclosure is 0.47. Finally, we find that country-level investor protection and firm-level corporate governance are both important in reducing the cost of equity capital. Our findings suggest that, in emerging markets where infrastructural factors, such as the legal protection of investors and the overall level of corporate governance, are not well established, reducing the expropriation risk by strengthening overall corporate governance appears to be more important in reducing the cost of equity capital than adopting a more forthright disclosure policy.

Keywords: corporate governance, Cost of capital, Disclosure, Investor protection

JEL Classification: G12, G34, G38, M41, M45

Suggested Citation

Chen, Kevin C. W. and Wei, K.C. John and Chen, Zhihong, Disclosure, Corporate Governance, and the Cost of Equity Capital: Evidence from Asia's Emerging Markets (June 2003). Available at SSRN: https://ssrn.com/abstract=422000 or http://dx.doi.org/10.2139/ssrn.422000

Kevin C.W. Chen (Contact Author)

Hong Kong University of Science and Technology ( email )

Clear Water Bay
Kowloon
Hong Kong
+852 2358-7585 (Phone)
+852 2358-1693 (Fax)

Kuo-Chiang (John) Wei

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

School of Accounting and Finance
Hong Kong Polytechnic University
Hung Hom, Kowloon
Hong Kong
852 2766 4953 (Phone)
852 2330 9845 (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)

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