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Shareholder rights, financial disclosure and the cost of equity capital

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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.

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Author information

Authors and Affiliations

  1. College of Business, University of Houston, Houston, Texas, 77204-6021

    C. S. Agnes Cheng

  2. School of Accountancy, University of Memphis, Memphis, Tennessee, 38152

    Denton Collins

  3. College of Business, Butler University, Indianapolis, Indiana, 46208

    Henry He Huang

Authors
  1. C. S. Agnes Cheng
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  2. Denton Collins
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  3. Henry He Huang
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Correspondence to Denton Collins.

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JEL Classification G30 · M10

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Cheng, C.S.A., Collins, D. & Huang, H.H. Shareholder rights, financial disclosure and the cost of equity capital. Rev Quant Finan Acc 27, 175–204 (2006). https://doi.org/10.1007/s11156-006-8795-2

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