Agency costs of free cash flow and the effect of shareholder rights on the implied cost of equity capital

Kevin C.W. Chen, Zhihong Chen, K. C.John Wei

Research output: Journal article publicationJournal articleAcademic researchpeer-review

127 Citations (Scopus)

Abstract

In this paper, we examine the effect of shareholder rights on reducing the cost of equity and the impact of agency problems from free cash flow (FCF) on this effect. We find that firms with strong shareholder rights have a significantly lower implied cost of equity after controlling for risk factors, price momentum, analysts' forecast biases, and industry and year effects than do firms with weak shareholder rights. Further analysis shows that the effect of shareholder rights on reducing the cost of equity is significantly stronger for firms with more severe agency problems from FCFs.

Original languageEnglish
Pages (from-to)171-207
Number of pages37
JournalJournal of Financial and Quantitative Analysis
Volume46
Issue number1
DOIs
Publication statusPublished - 1 Feb 2011
Externally publishedYes

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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