Review of Quantitative Finance and Accounting

, Volume 27, Issue 2, pp 175–204

Shareholder rights, financial disclosure and the cost of equity capital

Authors

  • C. S. Agnes Cheng
    • College of BusinessUniversity of Houston
    • School of AccountancyUniversity of Memphis
  • Henry He Huang
    • College of BusinessButler University
Article

DOI: 10.1007/s11156-006-8795-2

Cite this article as:
Cheng, C.S.A., Collins, D. & Huang, H.H. Rev Quant Finan Acc (2006) 27: 175. doi:10.1007/s11156-006-8795-2

Abstract

This study extends research into whether shareholder rights and disclosures of financial-related attributes are associated with firms' costs of equity capital. Using cost-of-equity-capital estimates derived from expected earnings growth valuation models, we find that firms with stronger shareholder rights regimes and higher levels of financial transparency are associated with significantly lower costs of equity capital. We also find evidence that greater financial disclosure and stronger rights regimes interact in reducing firms' costs of equity capital, such that the effect of a high level of one mechanism is minimal when it is combined with a low level of the other. Finally, we document that neither factor dominates the other in their associations, and that there are tradeoffs between disclosure levels and shareholder rights in their influence on firms' implied costs of equity capital.

Keywords

Corporate governanceShareholder rightsDisclosureCost of equity capital

Copyright information

© Springer Science + Business Media, LLC 2006