Ownership Concentration, Disclosure Quality and the Cost of Equity in Chinese Listed Private Firms

Abstract

This study tests a proposed nonlinear relationship between ownership concentration and the cost of equity in Chinese private listed firms. It also aims at testing the potential role of disclosure quality in mitigating the adverse consequences of concentrated ownership. It finds that the initial concentration of ownership reduces the cost of equity but once the ownership concentration surpasses an optimal threshold further concentration results in higher cost of equity. Moreover, the optimal level of ownership concentration for value maximization (i.e., 45%) is much higher than that for minimizing the cost of equity (i.e., 28%). More importantly, empirical evidence provides strong support for a moderating role of disclosure quality, where better disclosure quality reduces the strength of positive relationship between ownership concentration and the cost of equity. These findings underscore the potential role of disclosure quality in alleviating the adverse consequences of ownership concentration in an economy characterized by high ownership concentration.