Non-GAAP Earnings Comparability and Cost of Equity Capital

Separation of ownership and control in firms creates information asymmetry problems between shareholders and managers that expose shareholders to a variety of agency risks. This paper investigates the extent to which governance attributes that are intended to mitigate agency risk affect firms' cost of equity capital. We examine governance attributes along four dimensions: (1) financial information quality, (2) ownership structure, (3) shareholder rights, and (4) board structure. We find that firms reporting larger abnormal accruals and less transparent earnings have a higher cost of equity, whereas firms with more independent audit committees have a lower cost of equity. We also find that firms with a greater proportion of their shares held by activist institutions receive a lower cost of equity, whereas firms with more blockholders have a higher cost of equity. Moreover, we find a negative relation between the cost of equity and the independence of the board and the percentage of the board that owns stock. Collectively, the governance attributes we examine explain roughly 8% of the cross-sectional variation in firms' cost of capital and 14 % of the variation in firms' beta. The results support the general hypothesis that firms with better governance present less agency risk to shareholders resulting in lower cost of equity capital.

Corporate sexual orientation equality policies and the cost of equity capital

PurposeThe purpose of this paper is to investigate whether managerial ownership affects the association between shareholder rights and the cost of equity capital.Design/methodology/approachPrior 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.FindingsThe 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/applicationsFindings 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/valueThis paper reveals the interaction between two major governance variables in affecting firm valuation.

Riding the waves of technology through the decades: The relation between industry-level information technology intensity and the cost of equity capital

This study examines the effect of corporate social responsibility (CSR) towards primary stakeholders on the cost of equity capital in Chinese listed firms, and divides the sample into state-owned enterprises (SOEs) and non-state-owned enterprises (NSOEs) for comparison. We construct a set of CSR index systems to measure the quality of the CSR practices and use several approaches to estimate firms’ ex ante cost of equity capital. The results show that firms with higher CSR scores have significantly lower cost of equity capital. In particular, we find that investments in improving CSR towards investors make the greatest contribution to reducing firms’ equity financing costs, and the cost of capital effects of CSR is more significant in recessions than in economic booms. In addition, SOEs have better CSR and lower cost of equity capital than NSOEs, but the effect of CSR in reducing the cost of equity capital is greater for NSOEs than for SOEs. The findings suggest that CSR toward primary stakeholders can be profitable and beneficial to Chinese firms.

PurposeDigitalization is an element capable of improving companies’ financial performance. Despite the relevance of the topic, the financial effects associated with extensive transparency in digitalization choices have rarely been explored in extant literature. This study aims to close this important gap by examining the effect of digitalization-related information on the cost of equity capital.Design/methodology/approachThis study uses manual content analysis on a sample of 122 international listed firms to measure the level of transparency in digitalization choices and a regression model to test the effect of this transparency on the cost of equity capital.FindingsThe results show that broad transparency allows firms to benefit from a lower cost of equity capital. From this perspective, disseminating information about digitalization choices in a signaling theory key represents the signal that companies send to investors.Originality/valueThis study extends the knowledge about the potential of transparency to facilitate access to finance by examining the effect of another type of information, namely, those relating to digitalization choices, on the cost of equity capital.

Drawing from the overarching framework of the agency theory, corporate governance and information risk, this thesis examines the association between nominating committee existence and information risk as proxied by firm’s implied cost of equity capital. Given the theoretical framework of resource dependency and the emerging board capital literature, this thesis builds on these foundations to investigate the implications of nominating committee expertise and social capital attributes in the context of information risk. This thesis also examines the collaboration of nominating committee attributes in the context of the team effectiveness literature. As the engagement of recruiting consultants may be perceived by investors to be detrimental to effective monitoring, this thesis further investigates the association between nominating committee’s use of outside recruiting consultant and firm’s implied cost of equity capital. Using data from listed U.S. firms in the sample period 2004 to 2009, the evidence indicates that firms that have established nominating committee experience lower cost of equity capital. This is consistent with the view that the presence of nominating committee curbs CEO’s entrenchment of elected directors; thus signals monitoring credibility and lower information asymmetry. Results suggest that nominating committees with finance/ accounting expertise and top management expertise are associated with lower cost of equity capital. This is consistent with the notion that such expertise are determinants of monitoring effectiveness in recruiting qualified monitors which signals lower information risk. However, I do not find evidence of associations between business/operational and human resource management expertises with cost of equity capital. The evidence also indicates that investors perceive nominating committee social capital attribute to be detrimental to monitoring effectiveness resulting in a positive association with cost of equity capital. Further analysis reveals that the negative perception of social capital attribute is driven by nominating committee network linkage to financial institutions; as no association is observed between educational institutions network linkage and other business entities network linkage with the cost of equity capital. The examination of the collaborations of attributes interestingly reveals that the collaboration of attributes can create either positive (negative) synergistic effect to enhance (diminish) nominating committee effectiveness; demonstrating the complex dynamics of how different attributes work (not work) together. Additionally, results suggest that investors perceive nominating committee’s use of outside recruiting consultants impairs the director recruitment process resulting in higher cost of equity capital. Fundamentally, this thesis provides insight into the way the expertise and social capital attributes affect the agency and resource dependency roles of nominating committee with respect to information risk. This thesis contributes to the growing strand of board capital literature by taking up the challenge to identify nominating committee relevant expertise and social capital attributes for empirical examinations. Further, this thesis contributes to the current debate on corporate board’s engagement of consultants. Overall this thesis is relevant for regulators and firms as it provides valuable insights as to the importance to consider the individual and combinative effects of nominating committee attributes on monitoring effectiveness and to assess the independence issues when engaging recruiting consultants.

This study examines the effect of institutional common ownership on a firm’s cost of equity capital. Recent empirical findings on common ownership yield opposing predictions: increased strategic alliance in the product market could increase the covariance of a firm’s cash flows with the other firms, leading to a higher cost of equity capital. Reduced product market risk that is in part non-diversifiable could lead to a lower cost of equity capital. In both OLS and difference-in-differences settings, we document a negative and significant relation between common ownership and the cost of equity capital. We also provide direct evidence on common ownership reduces product market predation risk, distress risk, and overall risk while increases stock liquidity. Overall, our findings indicate that common ownership offers benefits to individual firms by reducing the cost of equity financing.

Due to the immaturity of bond market and the defects of internal governance structure, Chinese-listed companies have a strong preference for equity financing. How to reduce the cost of equity capital is particularly important for Chinese-listed companies. As an equity incentive system, employee stock ownership plan (ESOP) can reduce the agency conflicts among shareholders, executives, and employees to some extent. These reduced conflicts will, in an efficient capital market, be reflected in a lower cost of equity capital. This paper investigates whether the implementation of ESOP in a new era in China affects the cost of equity capital and further explores whether the impact of ESOP on the cost of equity capital is affected by the ownership nature, the firm size, and the contract design of ESOP. The results show that the implementation of ESOP reduces the cost of equity capital of enterprises. Compared with state-owned enterprises and large enterprises, the implementation of ESOP is more likely to reduce the cost of equity capital in non-state-owned enterprises and small enterprises. Furthermore, the reduction effect of ESOP on the cost of equity capital is influenced by the contract design of ESOP. This study not only enriches the literature on the relationship between employee stock ownership and the cost of equity capital but also provides a new idea for listed companies to reduce the cost of equity financing.

Do Co-opted boards affect the cost of equity capital?

Labour outsourcing has become increasingly prevalent due to rising labour costs and a shrinking working-age population in China. Despite extensive research on outsourcing’s operational benefits, its effect on financing costs remains unclear. This study fills this gap by examining how labour outsourcing influences firms’ cost of equity capital. Using manually collected labour outsourcing data of A-share listed companies in China from 2012 to 2022, this study examines the impact of labour outsourcing on firms’ cost of equity capital. The findings are as follows: First, labour outsourcing significantly reduces the cost of equity capital. Second, mechanism testing shows that labour outsourcing can reduce companies’ business risk and agency costs, benefiting the improvement of investors’ expectations for firm performance, thereby resulting in a lower cost of equity capital. Third, moderating analysis indicates that labour outsourcing by non-state-owned enterprises, firms facing higher financing constraints and greater economic policy uncertainty and firms located in areas with lower unemployment rates is viewed by investors as a positive signal, significantly improves investor expectations and leads to a more substantial decrease in the cost of equity capital.

PurposeThere has been an ongoing call from various groups of stakeholders for social and environmental practices to be integrated into companies’ operations. A number of companies have responded by engaging in socially and environmentally responsible activities, while others choose not to participate in these activities, which incur additional costs. The absence of consensus regarding the economic implications of social and environmental practices provides the impetus for this paper. This study aims to examine the association between corporate social and environmental practices (CSEP) and the cost of equity capital measured by fourex antemeasures using a sample of UK listed companies.Design/methodology/approachFirst, we undertake a review of the extant literature on CSEP. Second, using a sample of 236 companies surveyed in “Britain’s most admired companies” in terms of “community and environmental responsibility” during the period 2010-2014, we estimate four implied a cost of equity capital proxies. The relationship between a companies’ cost of equity capital and its CSEP is then calculated.FindingsThe authors find evidence that companies with higher levels of CSEP have a lower cost of equity capital. This finding determines the significant role played by CSEP in helping users to make useful decisions. Also, it supports arguments that firms with socially responsible practices have lower risk and higher valuation.Practical implicationsThe finding encourages companies to be more socially and environmentally responsible. Furthermore, it provides up-to-date evidence of the economic consequences of CSEP. The results should, therefore, be of interest to managers, regulators and standard-setters charged with developing regulations to control CSEP, as these practices are still undertaken on a voluntary basis by companies.Originality/valueTo the best of the authors’ knowledge, this is the first study to investigate the association between CSEP of British companies and their cost of equity capital. The study complements Ghoulet al.(2011), who examine the relationship between CSR and the cost of equity capital of the US sample. The authors extend Ghoulet al.(2011) by using a sample of the UK market after applying International Financial Reporting Standards.

This paper finds, consistent with Lopes and de Alencar (2010), that the strength of association between corporate information disclosure and cost of capital depends on the corporate disclosure environment. This paper finds that in an environment where disclosure requirement is not rich, the higher variation from the disclosure practices of firms leads to significant lower cost of equity capital. Corporate firms that commit resources to increased information disclosure and transparency are compensated with lower cost of equity capital, reduced information asymmetry between corporate insiders and investors which leads to lower or little discount on their shares hence the lower cost of equity capital reported. Corporate disclosure and transparency is statistically significantly negatively related to cost of equity capital on the Ghana Stock Exchange (GSE).

Does international experience of managers bring financing benefits? Evidence from the cost of equity capital

This study examines the effect of audit quality on earnings management and cost of equity capital of listed companies in India. Our results show that companies employing a high‐quality auditor have a lower degree of earnings management and lower cost of equity capital. The results also show that companies belonging to business groups have a lower degree of earnings management and lower cost of equity capital than do stand‐alone companies but that they benefit less from employing a high‐quality auditor. Our results are based on a large sample of 7,303 firm‐year observations on listed companies in India and are robust to alternative measures for our main variables – audit quality, earnings management, and cost of capital – and to tests for endogeneity and the impact of the global financial crisis (GFC). Given the distinctive and unique institutional features of the Indian market such as the dominant role of family business groups in the national economy, large market share of domestic audit firms, less litigious environment, and less effective professional accounting bodies in checking audit failure, our findings make a significant contribution to the literature on the role of audit quality as a corporate governance monitoring mechanism as reflected in the impact on earnings management and cost of equity capital.