The relation between excess control and cost of capital

Yves Bozec · Claude Laurin · Iwan Meier

21 citations0/0 files storedInternational Journal of Managerial Finance

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Corporate Finance and Governance Auditing, Earnings Management, Governance Financial Reporting and Valuation Research

Abstract

Purpose – The purpose of this study is to investigate the relationship between dominant shareholders, whose voting rights exceed cash flow rights (excess control), and firms’ cost of capital, including both equity capital and debt. Design/methodology/approach – This research is conducted in Canada over a four-year period from 2002 to 2005 and uses panel data of 155 S&P/TSX firms. The weighted average cost of capital is regressed on excess control using fixed-effect regressions in a two-stage least squares framework. Findings – The paper finds evidence that the cost of capital increases with excess control. The paper also confirms that for firms incorporated under the less protective Quebec incorporation law the excess control and, therefore, cost of capital is higher than for firms incorporated in the other provinces under the common law regime. Originality value – Prior work examined the relationship between excess control and firm value, mostly Tobin'sQ. By using cost of capital, the study explores another channel through witch excess control may affect firm value.

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References

1993Common risk factors in the returns on stocks and bonds 1998Law and Finance 1968FINANCIAL RATIOS, DISCRIMINANT ANALYSIS AND THE PREDICTION OF CORPORATE BANKRUPTCY 1999Corporate Ownership Around the World 1985The Structure of Corporate Ownership: Causes and Consequences 2001The theory and practice of corporate finance: evidence from the field 2000The separation of ownership and control in East Asian Corporations 2005How do family ownership, control and management affect firm value?

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