International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter?

✍ Scribed by LUZI HAIL; CHRISTIAN LEUZ

• Book ID: 111668118
• Publisher: John Wiley and Sons
• Year: 2006
• Tongue: English
• Weight: 359 KB
• Volume: 44
• Category: Article
• ISSN: 0021-8456
• DOI: 10.1111/j.1475-679x.2006.00209.x

✦ Synopsis

This paper examines international differences in firms' cost of equity capital across 40 countries. We analyze whether the effectiveness of a country's legal institutions and securities regulation is systematically related to crosscountry differences in the cost of equity capital. We employ several models to estimate firms' implied or ex ante cost of capital. Our results support the conclusion that firms from countries with more extensive disclosure requirements, stronger securities regulation, and stricter enforcement mechanisms have a significantly lower cost of capital. We perform extensive sensitivity analyses to assess the potentially confounding influence of countries' long-run growth