Legal protection of investors,corporate governance,and the cost of equity capital |
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| Authors: | Kevin CW Chen Zhihong Chen KC John Wei |
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| Institution: | 1. School of Management, Xi’an Jiaotong University, 710049, China;2. UQ Business School, The University of Queensland, QLD 4072, Australia;1. Department of Economics, Finance and Accounting, National University of Ireland Maynooth, Maynooth, Co. Kildare, Ireland;2. Department of Economics, Kemmy Business School, University of Limerick, Limerick, Ireland;1. University of Missouri, Trulaske College of Business, Columbia, MO 65201, United States\n;2. Florida Atlantic University, College of Business, Boca Raton, FL 33431, United States;3. San Jose State University, Lucas College of Business, San Jose, CA 95192, United States;1. School of Business and Management, American University of Sharjah, P.O. Box 26666, United Arab Emirates;2. Campus Saint-Jean, University of Alberta, Edmonton AB T6C 4G9, Canada;3. School of Accounting and Finance, The Hong Kong Polytechnic University, Hung Hum, Hong Kong |
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| Abstract: | This study examines the effect of firm-level corporate governance on the cost of equity capital in emerging markets and how the effect is influenced by country-level legal protection of investors. We find that firm-level corporate governance has a significantly negative effect on the cost of equity capital in these markets. In addition, this corporate governance effect is more pronounced in countries that provide relatively poor legal protection. Thus, in emerging markets, firm-level corporate governance and country-level shareholder protection seem to be substitutes for each other in reducing the cost of equity. Our results are consistent with the finding from McKinsey's surveys that institutional investors are willing to pay a higher premium for shares in firms with good corporate governance, especially when the firms are in countries where the legal protection of investors is weak. |
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