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International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter?

ECGI - Law Working Paper No. 15/2003

Rodney L. White Center for Financial Research Working Paper No. 17-04

AFA 2005 Philadelphia Meetings

65 Pages Posted: 21 Dec 2004  

Luzi Hail

University of Pennsylvania - The Wharton School

Christian Leuz

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network

Multiple version iconThere are 2 versions of this paper

Date Written: December 2005

Abstract

This paper examines international differences in firms' cost of equity capital across 40 countries. We analyze whether the effectiveness of a country's legal institutions and securities regulation is systematically related to cross-country differences in the cost of equity capital. We employ several models to estimate firms' implied or ex ante cost of capital. Our results support the conclusion that firms from countries with more extensive disclosure requirements, stronger securities regulation and stricter enforcement mechanisms have a significantly lower cost of capital. We perform extensive sensitivity analyses to assess the potentially confounding influence of countries' long-run growth differences on our results. We also show that, consistent with theory, the cost of capital effects of strong legal institutions become substantially smaller and, in many cases, statistically insignificant as capital markets become globally more integrated.

Keywords: Cost of equity, Disclosure regulation, Law and finance, International finance, Country risk, Legal system

JEL Classification: G14, G15, G31, G38, G30, K22, M41

Suggested Citation

Hail, Luzi and Leuz, Christian, International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter? (December 2005). ECGI - Law Working Paper No. 15/2003; Rodney L. White Center for Financial Research Working Paper No. 17-04; AFA 2005 Philadelphia Meetings. Available at SSRN: https://ssrn.com/abstract=641981 or http://dx.doi.org/10.2139/ssrn.641981

Luzi Hail

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-8205 (Phone)
215-573-2054 (Fax)

Christian Leuz (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-1996 (Phone)

HOME PAGE: http://faculty.chicagobooth.edu/christian.leuz/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org

European Corporate Governance Institute (ECGI)

Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Center for Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

University of Pennsylvania - Wharton Financial Institutions Center

3641 Locust Walk
Philadelphia, PA 19104-6218
United States

CESifo Research Network

Poschinger Str. 5
Munich, DE-81679
Germany

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