The implied cost of equity capital,corporate investment and chief executive officer turnover

This study investigates how the cost of equity capital, along with corporate investment, affects chief executive officer (CEO) turnover decisions. We hypothesize that the cost of equity conveys information about firm performance uncertainty that is informative of CEO talent. Consistently, our empirical results show that the likelihood of CEO turnover is positively associated with the implied cost of equity, after controlling for earnings and stock performance measures and risk factors. Additional analysis of reverse causality supports the causal effect of the high cost of equity on CEO dismissals. We also find that the positive association is more pronounced for firms that are more likely to suffer from underinvestment problems. These results suggest that the cost of equity plays a more important role in assessing CEO performance when the firm needs more external equity capital to pursue investment opportunities.     

Shareholder rights, financial disclosure and the cost of equity capital

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. JEL Classification G30 · M10     

Option implied volatilities and the cost of issuing equity

The structure of a firm-commitment Seasoned Equity Offering (SEO) resembles a put-option underwritten by an investment bank syndicate (Smith, 1977). Employing implied volatilities from issuers’ stock options as a direct forward-looking measure, this paper examines the impact of expected price risk around SEO issue dates on the direct cost of issuing equity. Using a comprehensive sample of 1208 SEOs between 1996 and 2009, we find issuers with higher option implied volatilities raise less external equity capital and pay higher investment bank fees in the stock market, ceteris paribus. The effect of implied volatility on the investment bank fees is stronger for larger issuers with lower pre-SEO abnormal realized stock volatilities, and for SEOs with higher expected price pressures around issue dates. These relationships are robust to adjustments for correlations among control variables, sample selection bias and also simultaneous determination of offer size and SEO fees.     

Degrees-of-freedom problem and implied cost of equity capital

Bias in implied cost of equity estimates arises from analyst optimism and a degrees-of-freedom problem. The common practice in empirical studies of using a proxy for the earnings forecast horizon beyond two years in the Ohlson and Juettner-Nauroth (OJ) model is potentially biased. We derive a generalized OJ model over a T period forecast horizon and indicate the extent of this bias. The implied cost of equity capital is obtained from a quadratic equation, where our constant term comprises T short-term annual earnings per share growth rates, rather than just the next-period counterpart in the OJ model.     

Financial development,corporate governance and cost of equity capital

Existing research suggests that external governance is more relevant than internal governance in affecting a firm’s value. We contribute to the literature by explicitly examining the interactive role played by country-level financial development and legal institutions in influencing the impact of firm-level governance on the cost of equity capital. Using a comprehensive sample of 7380 firm years drawn from 22 developed countries, we show that firm-level corporate governance attributes affect the cost of equity capital primarily in the Common Law countries with high levels of financial development. Our study is the first to highlight the complementary effects of legal origin, financial development and firm-level governance attributes in influencing the cost of equity capital.     

Equity value,implied cost of equity and shareholders’ real options

This study investigates the effects of shareholders’ real options on (i) firm financial performance and (ii) estimations of the implied cost of equity. After measuring the equity value of steady‐state operations using the residual income model, and the abandonment and expansion options using the Black‐Scholes option pricing model, I find that firms with a large expansion (abandonment) option value experience better (worse) financial performance than those with a small such value. I also find that ignoring these options results in a downward bias in implied cost of equity estimates by an average of 1.23 percentage points.     

Association between Big 4 auditor choice and cost of equity capital for multiple‐segment firms

Prior studies document a negative association between Big 4 auditor choice and the implied cost of equity capital, suggesting that Big 4 auditors mitigate information asymmetry (IA) between shareholders and managers. This study extends this line of research and reports that the negative association is more pronounced in multiple‐segment firms, where IA is more severe than in single‐segment firms. We also find that the association between Big 4 auditor choice and the cost of equity capital becomes more negative as the number of segments increases. Taken together, our findings suggest that the role of Big 4 auditors in reducing the cost of equity capital becomes more significant when greater IA exists.     

Disclosure and the cost of equity in international cross-listing

In this paper, we examine the relationship between disclosure level and the cost of equity capital for a sample of international firms cross-listing on the New York Stock Exchange. Increased disclosure has the potential to reduce information asymmetry, reduce the cost of financing and increase analyst following. Using an international asset pricing model, we find that listing firms experience a decrease in both disclosure risk and systematic risk while matching firms do not. Further, we find that the magnitude of the decrease is related to three types of disclosure: accounting standards; analyst following; and exchange/regulatory investor protection. Our results suggest that increased disclosure through accounting standards is beneficial to investors and that disclosure can be accomplished through information intermediaries, e.g., analyst following. For firms with the lowest levels of disclosure prior to cross-listing, all three types of disclosure appear to be valuable.

Price differences between equity classes. Corporate control,foreign ownership or liquidity?

This paper is the first comprehensive study of price differences for dual class equity at the Oslo Stock Exchange. It analyzes the relative importance of corporate control, foreign ownership restrictions and stock market liquidity for the price differences. The Norwegian market has the peculiar feature that in part of the sample period non-voting shares were trading at a premium to voting shares, i.e., what is usually termed the “voting premium” was negative. This result can be rationalized by restrictions on foreign ownership. In the later part of the period, with no regulatory restrictions on foreign ownership, the voting premium is positive, and related to corporate governance and liquidity.     

境外股东持股对大股东利益侵占约束——基于中国上市公司的经验证据

依据2006~2011年沪深两市上市公司数据,考量不同类型的外资持股对中国上市公司大股东侵占的约束影响。结果表明,外资持股未能有效制约大股东侵占行为,不同性质的境外投资者对抑制大股东侵占的作用存在差异。QFII能够一定程度上抑制大股东对小股东利益的侵占,而银行、保险和证券公司持股均不能对上市公司大股东侵占形成有效监督和制约,不仅未减轻大股东对小股东的利益侵占,反而加重了上市公司大股东和中小股东的利益冲突。     

Beyond CAPM: estimating the cost of equity considering idiosyncratic risks

The present study proposes a new evaluation approach aimed at estimating the cost of equity through standardized models which consider an innovative set of firm-specific information on the main unsystematic risks which are typical of any business. Our objective is extending the Capital Asset Pricing Model (CAPM) by defining a standard formula for quantifying the premium for certain idiosyncratic risks as a function of a new set of firm-specific quantitative information. We define two econometric models, for listed and non-listed firms respectively, which consider five idiosyncratic risk factors: firm size, value factor, operating risks, financial structure and stock market price volatility. The models were tested on a sample of European non-financial companies. The empirical results show that while the CAPM systematically underestimates the cost of equity, the proposed models correctly estimate its expected value; furthermore, they show a slight improvement also in terms of estimates’ volatility. Due to their efficacy and ease of use, the proposed models represent a valid practical tool for investors, analysts and professional evaluators. This work contributes to the existing literature by proposing a typologically innovative extension of the CAPM set of explanatory variables, defining and testing new models for the estimation of the unsystematic risks’ spread of the cost of equity based on an original set of firm-specific accounting and market information.     

Disclosure,conservatism and the cost of equity capital: A review of the foundation literature

In this review piece, we survey the literature on the cost of equity capital implications of corporate disclosure and conservative accounting policy choice decisions with the principle objective of providing insights into the design and methodological issues, which underlie the empirical investigations. We begin with a review of the analytical studies most typically cited in the empirical research as providing a theoretical foundation. We then turn to consider literature that offers insights into the selection of proxies for each of our points of interest, cost of equity capital, disclosure quality and accounting conservatism. As a final step, we review selected empirical studies to illustrate the relevant evidence found within the literature. Based on our review, we interpret the literature as providing the researcher with only limited direct guidance on the appropriate choice of measure for each of the constructs of interest. Further, we view the literature as raising questions about both the interpretation of empirical findings in the face of measurement concerns and the suitability of certain theoretical arguments to the research setting. Overall, perhaps the message which is most clear is that one of the most controversial and fundamental issues underlying the literature is the issue of the diversifiability or nondiversifiability of information effects.     

The effect of management earnings forecast characteristics on cost of equity capital

This study uses a framework presented in Hirst, Koonce, and Venkataraman (2008) to assess how differences in management earnings forecast characteristics influence a firm's cost of equity capital. I find that less specific forecasts, pessimistic forecasts, and forecasts that predict a loss for the period are associated with higher cost of equity capital levels and more timely forecasts and forecasts with more information content are associated with lower cost of equity capital levels. Analysis interacting control variables and forecast antecedents with forecast characteristics indicates that the effects forecast characteristics have on cost of equity capital are either enhanced or moderated depending on firm beta, firm size, firm book-to-market ratios, analyst following, prior forecast bias, and earnings quality. The results highlight the importance of interacting key variables when interpreting the market effect of management earnings forecasts.     

Religious atmosphere and the cost of equity capital: Evidence from China

The cost of equity capital (ICC) is a crucial component of investment decisions and corporate performance evaluations. This study explores the effect of a region’s religious atmosphere on ICC and finds that ICC tends to be lower when stronger religious atmosphere is created. We further use the mediation effect method to clarify the specific channel through which religious atmosphere reduces ICC, and find that earnings quality, corporate investment efficiency and corporate social responsibility partially mediate the effect of religious atmosphere on ICC. Moreover, the relationship between religious atmosphere and ICC is more pronounced in firms with stronger external law environments and higher audit quality, indicating that formal institutions and religious tradition complement each other.     

Full adoption of IFRSs in Brazil: Earnings quality and the cost of equity capital

The purpose of this paper is to investigate the impact of IFRS adoption on the earnings quality and the cost of equity capital of Brazilian companies. It is assumed that an increase in information contributes to a reduction in asymmetric information. A conjecture is that more efficient allocation of resources will result in a reduction in the cost of capital. The results show that the hypothesis of an increase in earnings quality after IFRS adoption holds true. The models used to analyze the equity cost of capital suggest a reduction in the cost of capital of around 7 basis points.     

Cost of capital effects and changes in growth expectations around U.S. cross-listings

This paper examines whether cross-listing in the U.S. reduces firms’ costs of capital. We estimate cost of capital effects implied by market prices and analyst forecasts, which accounts for changes in growth expectations around cross-listings. Firms with cross-listings on U.S. exchanges experience a decrease in their cost of capital between 70 and 120 basis points. These effects are sustained and exist after the Sarbanes-Oxley Act. We find smaller reductions for cross-listings in the over-the-counter market and for exchange-listings from countries with stronger legal institutions. For exchange-traded cross-listings, the cost of capital reduction accounts for over half of the increase in firm value, whereas for other types of cross-listings the valuation effects are primarily attributable to contemporaneous revisions in growth expectations.     

Improved corporate governance and Chinese seasoned equity offering announcement effects

Corporate governance and thus overall investor protection in China improved after the Split Share Structure Reform and the release of the new company law in 2005. This study examines the impact of improved corporate governance and investor protection on the market's reaction to seasoned equity offering (SEO) announcements in China. The market reacts to post‐2005 SEOs positively, while it reacts to pre‐2005 SEOs negatively. The different market reactions are attributed to the market's different perceptions of firms' intentions behind SEO decisions – that is, investors are more optimistic and have more trust in SEO issuers when they believe they are better protected.     

The initial private placement of equity and changes in operating performance in Taiwan

We propose the corporate governance hypothesis which suggests that the outside blockholders arising from the private placement of equity are more likely to have a significantly positive effect on firms with poor corporate governance. Using a sample of Taiwan‐listed firms with initial private placements of equity, our study’s results indicate that an improvement in operating performance is more likely to be seen after a private placement for those firms that are without independent directors, are controlled by a family, have lower insider shareholdings or are characterized by a pyramidal ownership structure. These findings are consistent with our hypothesis.