We thank Yakov Amihud, Ray Ball, Phil Berger (the editor), Gauri Bhat, Mariassunta Giannetti, Wayne Guay, Cam Harvey, Ole-Kristian Hope, Bob Holthausen, Leora Klapper, Rafael La Porta, David Larcker, D. J. Nanda, Felix Oberholzer, Shiva Rajgopal, Tjomme Rusticus, Terry Shevlin, René Stulz, Surjit Tinaikar, Joe Weber, Peter Wysocki, Stephen Young, two anonymous reviewers, and workshop participants at Duke University, Harvard Business School, Rutgers University, Singapore Management University, University of Chicago, University of Washington, the UC Davis Corporate Governance conference, the 2004 European Accounting Association meeting, and the 2004 European Finance Association meeting for helpful comments on earlier drafts. We also thank Bryan Chao, Nick Vedder, and Ian Weiliang for their research assistance. Luzi Hail acknowledges the financial support by the Research Commission of the University of Zurich. Analyst forecast data has been generously provided by I/B/E/S (Thomson Financial). Campbell Harvey, Ole-Kristian Hope, and Leora Klapper have graciously provided supplemental data. The study is one of the recipients of the 2004 Geewax and Terker Company Prizes.
International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter?
Version of Record online: 27 MAR 2006
Journal of Accounting Research
Volume 44, Issue 3, pages 485–531, June 2006
How to Cite
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. doi: 10.1111/j.1475-679X.2006.00209.x
- Issue online: 27 MAR 2006
- Version of Record online: 27 MAR 2006
- Received 5 June 2004; accepted 16 November 2005
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 several models to estimate firms' implied or ex ante cost of capital. Our results support the conclusion that firms from countries with more extensive disclosure requirements, stronger securities regulation, and stricter enforcement mechanisms have a significantly lower cost of capital. We perform extensive sensitivity analyses to assess the potentially confounding influence of countries' long-run growth differences on our results. We also show that, consistent with theory, the cost of capital effects of strong legal institutions become substantially smaller and, in many cases, statistically insignificant as capital markets become globally more integrated.