The effect of CEO ownership and shareholder rights on cost of equity capital

Abstract

Purpose -The purpose of this paper is to investigate whether managerial ownership affects the association between shareholder rights and the cost of equity capital.Design/methodology/approach -Prior literature has shown that strong shareholder rights are associated with a lower level of cost of equity capital. This paper empirically tests the interaction between managerial ownership and shareholder rights on affecting the cost of equity capital, using Gompers et al.'s governance score and Ohlson and Juettner-Nauroth's estimate of cost of equity capital. To mitigate the endogeneity arising from other governance variables affecting both shareholder rights and the cost of equity capital, the paper adopts both OLS and two-stage regression.Findings -The results indicate that managerial ownership aligns managers' interests with those of shareholders, leading to a lesser degree of agency problems and lower cost of equity capital. Furthermore, the evidence suggests that managerial ownership could substitute for shareholder rights in affecting the cost of equity capital, making strong shareholder rights less important in a high managerial ownership setting.Research limitations/applications -Findings in this paper suggest that firms need to consider the interaction between managerial ownership and shareholder rights in designing their governance structure to minimize their cost of equity capital.Originality/value -This paper reveals the interaction between two major governance variables in affecting firm valuation.

Do Corporate Governance Disclosures Matter for Bank Cost of Capital? Empirical Evidence from Accounting Statements of Egyptian Banks

“…Botosan, 1997;Gode and Mohanram, 2003). Few growth opportunities will cause increase in cost of equity capital, similarly as documented by Easton (2004) and Huang et al (2009). High ROA means better performance and stream of future cash flow that will be reflected in low cost of equity capital, while listing on the stock exchange indicates more monitoring and regulations that decrease cost of equity.…”

“…The literature shows empirically that the cost of capital is affected by several governance mechanisms such as; shareholder rights (Gompers et al, 2003;Cheng et al, 2006;Guedhami and Mishra, 2009;Huang et al, 2009), the legal protection (Chen et al, 2009), disclosure and transparency (Botosan, 1997;Baumann and Nier, 2004;Andrade et al, 2014), and other governance mechanisms such as board structure, ownership structure, and compensation structure (Chen et al, 2003;Ashbaugh et al, 2004;Pham et al, 2007;Shah and Butt, 2009). …”

“…Huang et al (2009) suggest that managerial ownership could substitute for shareholder rights in affecting the cost of equity capital. Cheng et al (2006) find that firms with stronger shareholder rights regimes and higher levels of financial transparency are associated with significantly lower costs of equity capital.…”

“…Ownership concentration is the proportion of shares held by the largest blockholder (Claessens et al, 2002), while ownership identification is proxied for by the foreign ownership and the institutional ownership. The foreign ownership is the proportion of shares held by foreign investors (Huang et al, 2009), while institutional ownership is the proportion of shares held by non-foreign institutional investors, including the Egyptian government.…”

Study on theories and mechanisms of corporate governance

“…Furthermore, the evidence suggests that managerial ownership could substitute for shareholder rights in affecting the cost of equity capital, making strong shareholder rights less important in a high managerial ownership setting (Huang et al, 2009). Inside ownership, family business, and foreign ownership have significant positive impacts on profitability (Abor and Biekpe, 2007).…”