TY - JOUR
T1 - Agency costs of free cash flow and the effect of shareholder rights on the implied cost of equity capital
AU - Chen, Kevin C.W.
AU - Chen, Zhihong
AU - Wei, K.C. John
PY - 2011/2
Y1 - 2011/2
N2 - 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. © Copyright Michael G. Foster School of Business, University of Washington 2011.
AB - 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. © Copyright Michael G. Foster School of Business, University of Washington 2011.
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U2 - 10.1017/S0022109010000591
DO - 10.1017/S0022109010000591
M3 - RGC 21 - Publication in refereed journal
SN - 0022-1090
VL - 46
SP - 171
EP - 207
JO - Journal of Financial and Quantitative Analysis
JF - Journal of Financial and Quantitative Analysis
IS - 1
ER -