Accounting Papers

Document Type

Journal Article

Date of this Version

6-2006

Publication Source

Journal of Accounting Research

Volume

44

Issue

3

Start Page

485

Last Page

531

DOI

10.1111/j.1475-679X.2006.00209.x

Abstract

This paper examines international differences in firms’ cost of equity capital across 40 countries. We analyze whether the effectiveness of a country’s legal institutions and securities regulation is systematically related to cross-country differences in the cost of equity capital. We employ four different models using analyst forecasts to estimate firms’ implied cost of capital. We find that countries with extensive securities regulation and strong enforcement mechanisms exhibit lower levels of cost of capital than countries with weak legal institutions, even after controlling for various risk and country factors. The effects are strongest for institutions providing information to investors and enabling them to privately enforce their contracts. We also show that, consistent with theory, these effects become substantially smaller or insignificant as capital markets become more integrated.

Copyright/Permission Statement

This is the peer reviewed version of the following article: HAIL, L. and LEUZ, C. (2006), International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter?. Journal of Accounting Research, 44: 485–531., which has been published in final form at http://dx.doi.....2006.00209.x. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving http://olabout.wiley.com/WileyCDA/Section/id-820227.html#terms.

Keywords

international finance, cost of equity, disclosure, legal system, law and finance

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Date Posted: 27 November 2017

This document has been peer reviewed.