Abstract
We explore the effect of firm heterogeneity on the implied cost of equity. To this end, we exploit two opposing effects of competition on the cost of equity: its negative effect on a firm's exposure to systematic risk and its positive effect on a firm's agency costs when it acts as a managerial disciplining device. Using a U.S. sample comprising 4764 firms from 1986 to 2017, we find that, on average, competition reduces equity costs by diminishing managerial expropriation, but increases these costs for small and distressed firms as they are more exposed to systematic risk. This agency costs link holds in developed countries only.
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