Shareholder rights and the cost of equity capital.
详细信息
文摘
This dissertation investigates the effects of firm-level shareholder rights on the cost of equity capital, the discount rate of a firm's future cash flow, in the United States. Investors charge a higher cost of equity capital for firms with higher agency costs. Shareholder rights reflect the shareholders' ability to exercise their indirect control of the firm, which includes their ability to replace the directors, and to meet and act, etc.; thus, strong shareholder rights can reduce the cost of equity capital by reducing agency costs. Though country-level shareholder rights have been shown to be effective in reducing the cost of equity capital, evidence conflicts regarding whether stronger firm-level shareholder rights actually lead to lower agency costs. Strong shareholder rights enable shareholders to discipline the managers, thus providing managers with fear of extracting private benefits; nevertheless, the threat of being removed, as is provided by strong shareholder rights, puts great pressure on managers to achieve short-term success.;My results indicate that investors generally view weak (strong) firm-level shareholder rights as detrimental (beneficial) to firm value and charge significantly higher (lower) costs of equity capital accordingly. Moreover, the market responds to the change in firm-level shareholder rights by adjusting the required rate of return accordingly. Further tests reveal that the effect is driven by two shareholder rights subindices: Protection and State . Finally, the results show that the effect of firm-level shareholder rights on the cost of equity capital is less pronounced for firms with high CEO ownership, which is consistent with the alignment theory.