Cost Of Equity Capital Research Articles

Can vertical interlocks of executives block adverse loops between R&D investment and the cost of equity capital? Evidence from China

Purpose This paper aims to conduct research on the role of vertical interlocks of executives in blocking adverse loops between research and development (R&D) investment and the cost of equity capital and explore the action path of vertical interlocks of executives. This paper also analyzes the differences in the effect of vertical interlocks of chairman, vertical interlocks of chief executive officer (CEO) and vertical interlocks of CEO duality. Design/methodology/approach This paper uses 28,078 firm-year samples from Chinese A-share listed companies to study the impact of R&D investment on the cost of equity capital using univariate group analysis and multiple regression methods. This paper analyzes the role of vertical interlocks of executives in reducing the positive impact of R&D investment on the cost of equity capital by constructing interaction variables, by using group testing method to analyze the differences in the vertical interlocks of executives. This study also uses propensity score matching and instrumental variables to conduct robustness tests. Findings The vertical interlocks of executives can block adverse loops between R&D investment and the cost of equity capital. The role of executive vertical interlocks is more prominent in non-state-owned firms, mainly exerting the resource effect that supports the innovation of non-state-owned firms, including the information resource effect and the financial resource effect. Through heterogeneity analysis, this paper discovered that the role of vertical interlocks of chairman is greater than that of the CEO and the CEO duality. Originality/value Based on the perspective of the correlation effect generated by vertical interlocks of executives, this paper analyzes the path of promoting corporate innovation. This provides new empirical evidence for studying the collaborative governance effect of vertical interlocks of executives “supervision effect, financial resource effect and information resource effect.” This study provides useful insights for regulatory authorities to regulate and guide development of the vertical interlocks of executives.

The Big Three Passive Investors and the Cost of Equity Capital

This study investigates the role of the Big Three passive investors (BlackRock, Vanguard, and State Street) in influencing firms’ cost of equity. By examining the unique ownership structure these investors bring, the research sheds light on a pivotal yet underexplored aspect of institutional ownership and its implications for corporate financing. Using a comprehensive dataset spanning from 1997 to 2016, this study demonstrates that increased ownership by the Big Three is associated with improved disclosure practices and reduced information asymmetry, leading to a lower cost of equity. However, the study also uncovers a nuanced trade-off, as concentrated ownership may introduce liquidity risks in certain contexts. These findings bridge a critical gap in the literature by reconciling divergent perspectives on the role of passive investors and provide actionable insights for institutional investors, regulators, and corporate managers seeking to understand the broader implications of passive ownership on firm valuation and financing strategies.

How sustainability reporting affects equity capital costs: Sustainability assurance and assurance providers as moderating variables

This research provides empirical evidence on how sustainability reporting is associated with reduced equity capital costs, in particular moderating the role of sustainability assurance and Big Four accounting firms. Drawing from the database of listed companies on the Indonesia Stock Exchange, this research will employ Ordinary Least Square (OLS) regression with robust standard errors in testing the hypotheses. The findings indicate a significant negative relationship between sustainability reporting and the cost of equity capital, with sustainability assurance and Big Four firm involvement amplifying this effect. However, it should be noted that the sample size in this study is quite small, and adoption of the Global Reporting Initiative (GRI) G4 standard has been very recent, so generalizations should not be drawn from this study. The findings indicate that, beyond securing credible assurance, the quality of sustainability reports plays a crucial role in enhancing the credibility of financial reporting. This research is one of the first attempts to examine these relationships within the context of a developing country, Indonesia.

XBRL extensions and cost of equity capital in Chinese firms: a natural experiment

ABSTRACT This study investigates whether XBRL (eXtensible Business Reporting Language) extensions affect cost of equity capital in Chinese firms during the historical sample period of 2015–2016. We find that the additional information in XBRL extensions is positively associated with cost of equity capital in Chinese firms. These findings suggest that the excess information in XBRL extensions reduces the reliability and comparability of financial reporting, leading to an increase in information processing cost and exacerbating the quality of information environment in Chinese capital market. We also find that the positive association between XBRL extensions and cost of capital is stronger in the firms with higher information asymmetry of lower institutional ownership and lower analyst coverage. Furthermore, XBRL extensions associated with specific financial statement items play a significant role in raising cost of equity capital. Our findings indicate that the redundancy of information in XBRL extensions complicates information processing for financial statement users, thus adding value to the XBRL standard makers.

CEO Duality, Audit Committee Independence and Cost of Equity Capital: An Empirical Study from Jordan

CEO Duality, Audit Committee Independence and Cost of Equity Capital: An Empirical Study from Jordan

Accounting conservatism mediates the relationship between corporate governance and equity capital costs

Purpose: This study examines the effect of corporate governance as proxied by institutional and managerial ownership and profitability on the cost of equity capital, both directly and indirectly, through accounting conservatism as a mediating variable. Design/Methodology/Approach: The population of this study was manufacturing companies listed on the Indonesia Stock Exchange in 2020–2022. The sample selection was carried out using the purposive sampling method, resulting in 230 data points and then tested using multiple linear regression. Findings: Institutional ownership and profitability were revealed to have a positive influence on accounting conservatism, while managerial ownership had no influence. Profitability and accounting conservatism exerted a negative effect on the cost of equity capital. However, institutional ownership generated a positive effect, but managerial ownership did not affect the cost of equity capital. Further test results uncovered that the impact of institutional ownership and profitability on the cost of equity capital was mediated by accounting conservatism. Research limitations/Implications: This research has limitations, including the relatively low adjusted R2 value. Proxies for corporate governance from ownership and board structure should be included in future studies Originality / value: The findings of this research enrich previous research regarding the economic consequences of corporate governance, profitability, and accounting conservatism in equity markets in developing countries, especially Indonesia.

Does flood risk affect the implied cost of equity capital?

Does flood risk affect the implied cost of equity capital?

MANAGING COMPETITIVENESS AND RISK: THE EFFECT OF SHARIAH COMPLIANCE AND THE CENTRAL ROLE OF REPUTATION AND INVESTMENT EFFICIENCY

Business practices, especially in Muslim-majority countries, are more influenced by religious values. Therefore, CSR is less relevant or relatively limited to be implemented as an accountability mechanism, so it is advisable to consider religious values as an alternative approach to business ethics. In this context, adopting Sharia Compliance (SC) is seen as one of the dimensions of accountability, a form of business ethics implementation, and a manifestation or proxy of business ethics other than CSR. Therefore, based on the theory of business ethics, this study develops and tests a trivariate relationship model to explain how reputation and investment efficiency play a role in the relationship between SC and competitiveness and risk as proxied by the cost of equity capital. Using 825 observations, the estimation results indicate a partial mediation effect of reputation in the relationship between SC and risk (cost of equity capital). However, there is no mediation effect in the relationship between SC and competitiveness. Other estimation results indicate a partial mediation effect of investment efficiency in the relationship between SC and the cost of equity capital and competitiveness. This indicates that investment efficiency can provide additional totals in the relationship between SC and the cost of equity capital and competitiveness. However, the mediation effect of investment efficiency in the relationship between SC and SC competitiveness produces a total negative effect. Therefore, it can be said that the mediation of investment efficiency in the relationship between SC and competitiveness is an inconsistent or competitive mediation model. Overall, the partial mediation effect of reputation and investment efficiency indicates (1) there are other mediators (hidden mediators) in the relationship between SC and equity capital costs and competitiveness, (2) SC in reducing equity capital costs and producing competitiveness, among others, by building a good reputation and utilizing positive NPV investment opportunities.

Is Cost of Equity Capital influenced by intellectual capital? An empirical analysis from the perspective of Indian companies

PurposeThis empirical study is developed with an aim of exploring how and to what extent the current year’s as well as lagged years’ disclosure level of intellectual capital (IC) influences the firm's value which is measured through the Cost of Equity Capital.Design/methodology/approachThe content analysis technique is applied on the annual reports of 50 sample companies to construct an IC disclosure index for measuring the volume of IC disclosure and to collect other relevant information for the study periods from 2015–16 to 2019–20. However, due to unavailability of information for all the study periods, 7 companies were eliminated and finally 43 companies are used for analytical purpose. Keeping in mind about the aim of this research, regression equations are run to analyze the cause–effect relationship between the IC disclosure level and the Cost of Equity Capital after excluding the influence of other factors like firm size, unlevered beta and market-to-book ratio.FindingsThe present study finds that the amount of IC disclosure has an inverse association with the cost of equity capital. Our study also confirms that lagged years’ IC disclosure has a greater inverse effect than the current year’s IC disclosure on the Cost of Equity Capital.Originality/valueFor the first time in the literature of IC disclosure in the perspective of Indian context, this empirical study takes an initiative to investigate the impact of current year’s as well as backlog years’ IC disclosure level on the Cost of Equity Capital.

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.

Impact of mandatory environmental information disclosure on the capital cost: Evidence from listed companies in China

Impact of mandatory environmental information disclosure on the capital cost: Evidence from listed companies in China

Audit report lag and the cost of equity capital

PurposeThis research investigates the effect of audit report lag on the cost of equity capital. We argue that an extended audit report lag reduces the value of information and raises concerns for investors, resulting in an increased cost of equity capital.Design/methodology/approachWe hypothesize that audit report lag increases the firm cost of equity capital. We conduct ordinary least squares (OLS) regression analyses to examine our hypothesis. Finally, we also perform a range of sensitivity tests to examine the hypothesis and robustness of findings.FindingsUsing a sample of the listed US firms from 2003 to 2018, we find that firms with higher audit report lag have a higher cost of equity capital. Our findings are economically significant as one standard deviation increase in audit report lag raises 3.82 basis points of cost of equity capital. Furthermore, our results remain robust to endogeneity concerns and alternative proxies for the cost of equity capital measures. Finally, we confirm that audit report lag increases the firm cost of equity capital through increasing information asymmetry and future financial restatement as a mediating channel.Originality/valueWe contribute to the theoretical discussion about the role of audit report lag and investors' perceptions. Overall, our results suggest that audit report lag affects a firm 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

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

Corporate governance and cost of equity capital: the mediation role of accounting conservatism

Research aims: This study examines the effect of corporate governance as proxied by institutional and managerial ownership and profitability on the cost of equity capital, both directly and indirectly, through accounting conservatism as a mediating variable.Design/Methodology/Approach: The population of this study was manufacturing companies listed on the Indonesia Stock Exchange in 2020–2022. The sample selection was carried out using the purposive sampling method, resulting in 230 data points and then tested using multiple linear regression.Research findings: Institutional ownership and profitability were revealed to have a positive influence on accounting conservatism, while managerial ownership had no influence. Profitability and accounting conservatism exerted a negative effect on the cost of equity capital. However, institutional ownership generated a positive effect, but managerial ownership did not affect the cost of equity capital. Further test results uncovered that the impact of institutional ownership and profitability on the cost of equity capital was mediated by accounting conservatism.Theoretical contribution/Originality: The findings of this research enrich previous research regarding the economic consequences of corporate governance, profitability, and accounting conservatism in equity markets in developing countries, especially Indonesia.Practitioner/Policy implication: The results of this research can be used as consideration for investors in developing country capital markets when making investment decisions.Research limitation/Implication: This research has limitations, including the relatively low adjusted R2 value. Proxies for corporate governance from ownership and board structure should be included in future studies.

Earnings Management As A Moderator On The Effect Of Information Asymmetry On The Cost Of Equity Capital

To maximize the company's value, management must aim to reduce the Cost of Equity Capital (CEC) as much as possible. Investors will assume that the company's risk is low when the CEC is low, which in turn will enhance the company's value. However, the reality in Indonesia shows the opposite; the CEC of companies has been increasing year after year. Based on this phenomenon, it is necessary to examine the factors influencing CEC. Agency theory suggests that information asymmetry and earnings management can affect CEC. This study aims to test the direct effects of information asymmetry on CEC and earnings management on CEC, as well as the indirect effect of information asymmetry on CEC using earnings management as a moderating variable. The results of the data analysis show that information asymmetry affects earnings management and CEC. Furthermore, it was found that earnings management does not affect CEC. However, earnings management can moderate the relationship between information asymmetry and CEC

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

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

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

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

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