Cost Of Equity Capital Research Articles

Audit report lag and the cost of equity capital

Audit report lag and the cost of equity capital

Strong vs. stable: the impact of ESG ratings momentum and their volatility on the cost of equity capital

AbstractWe test whether in the cross-section of European stocks, the cost of equity capital is more strongly affected by the (upward) “slope” (identified as momentum over a period of time) of their ESG scores or by their “stability” (identified as the volatility of the scores over a period of time), measured around a given slope. We find that short-term ESG momentum is priced in the cross-section of stock returns but that it may increase or decrease the ex-ante cost of capital depending on the specific sample investigated. While short-term ESG momentum may represent a novel, priced systematic risk factor, there is also strong evidence that a ESG spread strategy that buys (sells) low (high) ESG score volatility stocks leads to a significant alpha and lower the ex-ante cost of capital. This suggests that ESG rating stability may carry a more reliable reward than improvements do, in terms of ex-ante equity cost of capital. These results are robust to the use of different sub-samples (over firms and sub-periods) and to forming the two quantitative ESG signals on the basis of alternative rating data.

The Information content of annual report and cost of equity capital: Based on Text Vectorization Method

Taking Chinese A-share listed companies in Shanghai and Shenzhen from 2017 to 2021 as the research sample, the method of text vectorization is used to construct an index of information content of annual report, and empirically test the impact of information content on the cost of equity capital. The results show that the information content is negatively related to the cost of equity capital, and the degree of information asymmetry plays a mediating role between them. This article is the first to verify the effect of information content on the cost of equity capital, and it is expected to provide theoretical guidance for regulators, enterprises and investors.

Impact of climate change risks on equity capital: Evidence-based on Chinese markets

The economic consequences of climate change at the enterprise level have received considerable attention. This study examines the positive effects of climate change risk on equity capital costs, which are realized through firms' operational risk, financial constraints, and the government's service environment. A higher corporate ESG rating enhances the positive effect of climate change risk on equity capital costs. We also find that the Paris Agreement has a benign policy effect on equity capital costs. Finally, expanding upon this groundwork, a thorough heterogeneity analysis has been conducted, encompassing three distinct dimensions—enterprise risk system, industry environmental attributes, and operational ecosystem.

The implied risks caused by ESG rating divergence: a test based on the cost of equity capital

ABSTRACT Environment, Social, and Governance (ESG) performance serves as a crucial factor in investor decision-making; however, the existence of ESG rating divergence adds complexity and investment risk to assessing a firm’s sustainable performance. This article investigates the impact and the mechanisms behind firms’ ESG rating divergence on the cost of equity capital, enriches the research content of the economic consequences of ESG rating. This article uncovers the following key findings: (1) Increasing the divergence in a firm’s ESG ratings correlates with a rise in the cost of equity capital. (2) The influence of ESG rating divergence on the cost of equity capital, primarily through stock market performance. Specifically, ESG rating divergence positively correlates with stock price synchronicity, exhibiting a mediating effect on the cost of equity capital; it is negatively correlated with stock returns and turnover rates. (3) Digital transformation and financial institution shareholding negatively moderate ESG rating divergence and the cost of equity capital. (4) The impact of ESG rating divergence on the cost of equity capital is more pronounced in non-state-owned, non-cross-border listed, and small-size firms. The conclusions of this study provide references for relevant institutions to standardize rating systems, provide references for firms to optimize ESG information disclosure.

North Korea's threats and the cost of equity capital: The effect of information environments

We examine how the information environment affects the association between North Korea's threats and the cost of equity financing. Using a sample of Korean publicly-listed firms from 2012 to 2019, we find evidence that the adverse effect of North Korea's threats on the cost of equity capital is more significant for companies in less transparent information environments after controlling for other factors. Our findings contribute to the literature by identifying that the information environment affects geopolitical risk.

DISCLOSURE AND ASYMMETRY INFORMATION EFFECT ON THE COST OF EQUITY CAPITAL WITH AUDIT COMMITTEE AS A MODERATING VARIABLE

In this study, we will use the audit committee as a moderator to look at how various disclosures such as general information, mandated disclosure, and corporate social responsibility affect the cost of equity capital. Specifically, this study relies on secondary data mined from sustainability and annual reports. This study's population consists of energy, consumer non-cyclical, and consumer cyclical enterprises that have been listed on the Indonesia Stock Exchange (BEI) between 2019 and 2022. This study uses the technique of purposive sampling to gather data. There is an imbalance in the data set since various companies had varied numbers of observations during the study period. From 2019 through 2022, 133 companies' data sets were deemed suitable for inclusion in the sample. This data study makes use of Eviews, a quantitative data analysis tool, to analyze the data using panel data analysis. Findings suggest that disclosures pertaining to general information and obligatory disclosures reduce the cost of equity capital, however disclosures on information asymmetry and corporate social responsibility do not. Audit committees have limited power to affect equity capital costs by reducing the impact of information asymmetry and increasing CSR disclosure; however, they are unable to do so with forced disclosure or general information disclosure

How do ESG controversies moderate the nexus between ESG performance and cost of capital? Evidence from European listed companies

PurposeThis study aims to investigate the effect of ESG controversies and their moderating role in ESG performance and the cost of equity and overall, short-term and long-term debt capital relationship in European listed companies.Design/methodology/approachThe study employs two-way fixed effects panel linear regression models on the balanced longitudinal dataset of 231 European non-financial companies listed in the MSCI Europe Index in 2017–2022. To check the robustness, the study utilises the fixed effects logistic regression models with heteroskedasticity-consistent standard errors.FindingsThe study reveals the significant effect of ESG performance (negative) and ESG controversies (negative) on the cost of debt capital and the substantial moderating effect of ESG controversies (positive). Additionally, it provides empirical evidence of the crossover moderating effect of ESG controversies in ESG performance and cost of equity relationship.Research limitations/implicationsThe findings contribute to corporate practice and empirically support legitimacy and stakeholder theories.Practical implicationsCompanies can utilise the results to proactively enhance their internal policies and behaviour to align with ESG practices and avoid ESG controversies, which will translate into reduced equity capital costs for shareholders and a lower cost of debt capital charged by creditors.Originality/valueTo the best of the authors’ knowledge, this is the first study to comprehensively investigate the influence of ESG controversies and their moderating effect in the context of the equity and debt capital cost for European listed companies.

The information effect versus governance effect of comment letters: Evidence from the cost of equity capital

AbstractThis paper uses a sample of comment letters issued and disclosed by the Shanghai and Shenzhen Stock Exchanges in China from 2015 to 2019 and empirically investigates the impact of comment letters on the cost of equity capital. The results show that the cost of equity capital raises after firms receive comment letters. However, when repeating the analysis using comment letters issued but undisclosed between 2013 and 2014, the observed effect dissipates, indicating an information disclosure channel. Moreover, the cost of equity capital is higher when the letters include more questions and demand independent opinions from auditors. Cross‐sectional tests show that this effect is influenced by investor protection, corporate information environment, and internal control quality. Additional tests show a negative association between the receipt of comment letters and both the likelihood and the amount of seasoned equity offerings, which can be attributed to the elevated cost of equity. Overall, our paper not only underscores the importance of public disclosure of government regulatory information, but also provides empirical evidence supporting the effectiveness of regulation by stock exchanges.

The registration-based IPO reform and the cost of equity capital: evidence from China

This paper investigates the impact of the registration-based IPO reform on firms’ cost of equity capital using samples of Chinese A-share listed firms. The results indicate that registration-based IPO reform significantly reduces the cost of equity capital. This effect is mainly observed in firms with higher-reputation underwriters, higher intensity of review inquiries, or higher institutional ownership. In addition, the mechanisms driving these reductions are enhanced information disclosure and improved IPO pricing efficiency.

Pain Sharing of CEOs in the Corona Pandemic: Effects of Reduction in CEOs Compensation on Firm’s Cost of Equity Capital

Pain Sharing of CEOs in the Corona Pandemic: Effects of Reduction in CEOs Compensation on Firm’s Cost of Equity Capital

Corporate Social Responsibility Disclosures and Cost of Equity Capital Evidence from Listed Interest Taking Banks in Nigeria

Disclosure of corporate social responsibility is strategic to the sustainability of any firm especially banks that have contributed to the economic development of Nigeria. When firms fail to adequately disclose their corporate social responsibility practices, providers of funds may be unaware of the risk and opportunities they are exposed to by investing in sech banks. The main objective of this study therefore was to examine the effect of corporate social responsibility disclosures on cost of equity of interest taking banks listed on the floor of the Nigerian Exchange Group from 2014-2023. The research design adopted for this study was ex post facto and secondary data were used. The population of this study consisted of 13 interest taking banks and 11 of these banks were purposively selected as the sample size. The panel regression analysis was employed in analyzing the data set and the statistical package employed was STATA version 16. The findings of this study revealed that community relations disclosures have a significant negative effect on the cost of equity capital; social donations disclosures have a positive but not statistically significant effect on the cost of equity capital while employee relations disclosures have a significant positive effect on the cost of equity capital of listed interest-taking banks in Nigeria. Based on the above findings, it was concluded that corporate social responsibility disclosures help reduce cost of equity of listed interest-taking banks in Nigeria. It was therefore recommended among others that management of these banks should be actively involved in community development and ensure transparent disclosure of these practices to stakeholders as this promote their sustainability and inclusiveness.

The impact of company participation in supply chain alliances on the cost of equity capital: Evidence from China

The alliance cooperation between corporations and upstream and downstream corporations in the supply chain is of great significance for optimizing resource allocation and enhancing company competitiveness. However, due to the limitation of data availability, there is still a lack of empirical tests on the economic consequences of firms' participation in supply chain alliances. Based on the data of strategic cooperation announcements issued by China's A-share listed companies from 2016 to 2022, this paper manually identifies supply chain alliances and studies the impact of companies' formation or participation in supply chain alliances on the cost of equity capital. The results show that forming or participating in supply chain alliances can effectively reduce the cost of equity capital for companies. The channel test shows that companies forming or participating in supply chain alliances can reduce the cost of equity capital by easing financing constraints and improving competitiveness. Further analysis shows that the pre-set amount and equity-based alliance in the alliance agreement have a more significant effect on reducing the cost of equity capital. At the same time, in regions with a higher degree of marketization and companies with weak supply chain discourse power, the effect of reducing the cost of equity capital after forming supply chain alliance is more significant. This paper reveals the impact of supply chain alliances on the cost of equity capital for corporations, enriches the research on the influencing factors of equity capital cost and the mechanism of company participation in supply chain alliances, helps the capital market improve the signal recognition ability of supply chain alliances, improves the efficiency of capital allocation and the rationality of capital flow, and provides ideas for promoting the quality and efficiency of supply chain alliance.

Unveiling the consequences of ESG rating disagreement: an empirical analysis of the impact on the cost of equity capital

ABSTRACT Recent academic research exhibits considerable disagreement among ESG ratings from different agency providers. The consequences of this disagreement on the market are still under-explored; thus, we investigate whether this disagreement impacts the cost of equity capital. Using a sample of 23,201 firm-month observations from January 2019 to March 2021, we find that ESG disagreement positively moderates the negative relationship between the average ESG score and cost of equity. By disentangling the aggregate ESG score, we find that the moderating effect of this disagreement does not hold for any pillar. Furthermore, the association between ESG rating disagreement and cost of equity is more pronounced in the presence of high analyst information uncertainty. Overall, our findings highlight that ESG rating disagreement jeopardizes investors’ confidence in ESG ratings and weakens the role of these ratings in reducing the cost of equity, pointing to the need to improve convergence across agency providers.

To Change or Not to Change: The Informativeness of REIT Annual Reports

Increasingly similar corporate disclosures may fail to provide potential investors with adequate information about a company to facilitate astute, informed, and/or rational decision making. In light of this repeatedly expressed SEC concern, the current investigation uses a sample of 1,910 annual report (10-k) filings by 234 separate equity REITs from 2000-2020 to examine the impact of year-over-year linguistic similarity on the perceived information content of corporate disclosures. Consistent with the aforementioned concerns, we document a significant increase in the degree of REIT annual report similarity over time. Despite this trend, we find that innovations in annual report disclosures remain directly related to observable changes in both the operational complexity and financial position of the firm. Furthermore, these innovations engender significant market reactions including changes in options trading activity, annual report readability, and the firm’s cost of equity capital. Lastly, these findings are both robust to the inclusion of alternative information channels and are significantly more pronounced within informationally opaque market settings. In sum, we find REIT annual reports remain a value-relevant source of information for market participants.

How corporate climate change mitigation actions affect the cost of capital

AbstractJapan has been at the forefront of global efforts to accelerate climate change mitigation. Japanese firms have led in the development of decarbonization technologies and have positively disclosed climate change‐related information based on the Task Force on Climate‐related Financial Disclosures recommendations to address climate change. We explore the relationship between corporate climate change mitigation actions and the cost of capital for 2100 Japanese listed companies from 2017 to 2021. The results reveal that a higher carbon intensity correlates with an increased cost of equity, debt, and weighted average cost of capital. Interestingly, although climate‐related information disclosure is associated with an increased cost of debt, it concurrently lowers the cost of equity and overall capital. This research recommends strategic approaches for firms to reduce their costs of capital while proactively combating climate change, highlighting the divergent responses of equity and bond markets to decarbonization initiatives.

Fixed and Variable Tax Expense and the Cost of Equity Capital

ABSTRACT Prior studies provide mixed evidence on the relation between tax avoidance and cost of equity capital. To understand how this relation varies across firms, we model income tax as containing both a fixed component (like a tax credit or deduction) and a variable component (a tax rate) and investigate how each type of tax expense affects the cost of equity capital. Unlike other fixed costs, the fixed tax component may be negative (a tax benefit). A lower fixed tax component always reduces cost of capital. The effect of a lower tax rate depends on the sign of the fixed tax component. With a negative fixed tax component, a lower tax rate increases cost of capital. Results of empirical tests are generally consistent with our predictions. Our results suggest the relation between cost of equity capital and tax avoidance is ambiguous when tax avoidance is accomplished through a lower tax rate. JEL Classifications: G12.

Does investor base affect the firm-level ex-ante cost of equity capital?

This research investigates how investor base affects the cost of equity capital (COE) in Indian companies, particularly in market conditions with weak investor protection and increased ownership concentration by promoters and families. Using ordinary least squares (OLS), panel fixed effects, and two-step system generalised method of moments (GMM) analysis on data spanning from 2016 to 2021, we discovered that a dispersed ownership structure is linked to a higher ex-ante COE. Our findings indicate that companies with dispersed shareholders have less motivation to monitor managers, which leads to the expropriation of minority shareholders and results in higher COE.

Why isn't composite equity issuance favored by the stock market? A risk-based explanation for the anomaly

Composite equity issuance anomaly is puzzling. This study presents a risk-based explanation that complements and transcends the behavior-based explanation by prior mainstream literature. Investors react to the signal embedded in the composite equity issuance and adjust a firm's risk level through implied cost of equity capital, which leads to lower subsequent stock returns. Empirical results show that firms with higher composite equity issuance are associated with more expensive equity financing. This positive effect remains solid after addressing potential endogeneity and is robust to individual and alternative measures of implied cost of equity capital. Moreover, further evidence demonstrates the role of agency problem for both internal and external factors. The positive effect is more pronounced for firms with less independent and diversified boards, lower financial reporting quality and leverage, higher R&D spending, in a non-competitive environment, and during a financial crisis respectively.

Punishment or deterrence? Environmental justice construction and corporate equity financing––Evidence from environmental courts

In this study, we explore the impact of the establishment of environmental courts, an environmental justice system, on the cost of equity capital. Based on a quasi-natural experiment of establishing environmental courts in China, we find that they have a deterrent effect and reduce the cost of equity capital for heavily polluting firms in localities. We also find that a low proportion of managerial ownership, a low level of analyst attention, and high environmental uncertainty induce this deterrent effect. Furthermore, mechanism tests indicate that environmental courts enhance corporate environmental engagement and corporate ESG ratings, increase long-term institutional investor ownership, and reduce urban environmental violations to achieve a deterrent effect. The findings are more pronounced for the trial court sample, firms in cities with lower public participation in environmental protection, and firms with lower environmental information transparency. We also suggest the impacts and underlying mechanisms of the environmental justice system on the equity capital market, which is conducive to long-term planning by firm managers.