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Agency Costs of Free Cash Flow and the Effect of Shareholder Rights on the Implied Cost of Equity Capital

Journal of financial and quantitative analysis, 2011-02, Vol.46 (1), p.171-207 [Peer Reviewed Journal]

Copyright © Michael G. Foster School of Business, University of Washington 2011 ;Copyright 2011 Michael G. Foster School of Business, University of Washington ;Copyright University of Washington, School of Business Administration Feb 2011 ;ISSN: 0022-1090 ;EISSN: 1756-6916 ;DOI: 10.1017/S0022109010000591 ;CODEN: JFQAAC

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Title:
Agency Costs of Free Cash Flow and the Effect of Shareholder Rights on the Implied Cost of Equity Capital
Author: Chen, Kevin C. W. ; Chen, Zhihong ; Wei, K. C. John
Subjects: Agency ; Analytical forecasting ; Capital costs ; Capital market ; Cash flow ; Companies ; Corporate governance ; Cost estimates ; Cost of capital ; Cost of equity ; Cost reduction ; Costs ; Earnings forecasting ; Economic theory ; Equity ; Equity capital ; Financial management ; G index ; Impact analysis ; Implicit costs ; Investment analysis ; Investors ; Risk factors ; Shareholders ; Shareholders rights ; Stockholders ; Studies
Is Part Of: Journal of financial and quantitative analysis, 2011-02, Vol.46 (1), p.171-207
Description: 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.
Publisher: New York, USA: Cambridge University Press
Language: English
Identifier: ISSN: 0022-1090
EISSN: 1756-6916
DOI: 10.1017/S0022109010000591
CODEN: JFQAAC
Source: ProQuest Central

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Agency Costs of Free Cash Flow and the Effect of Shareholder Rights on the Implied Cost of Equity Capital

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