The effect of CEO ownership and shareholder rights on cost of equity capital
Abstract
Purpose
The purpose of this paper is to investigate whether managerial ownership affects the association between shareholder rights and the cost of equity capital.
Design/methodology/approach
Prior literature has shown that strong shareholder rights are associated with a lower level of cost of equity capital. This paper empirically tests the interaction between managerial ownership and shareholder rights on affecting the cost of equity capital, using Gompers et al.'s governance score and Ohlson and Juettner‐Nauroth's estimate of cost of equity capital. To mitigate the endogeneity arising from other governance variables affecting both shareholder rights and the cost of equity capital, the paper adopts both OLS and two‐stage regression.
Findings
The results indicate that managerial ownership aligns managers' interests with those of shareholders, leading to a lesser degree of agency problems and lower cost of equity capital. Furthermore, the evidence suggests that managerial ownership could substitute for shareholder rights in affecting the cost of equity capital, making strong shareholder rights less important in a high managerial ownership setting.
Research limitations/applications
Findings in this paper suggest that firms need to consider the interaction between managerial ownership and shareholder rights in designing their governance structure to minimize their cost of equity capital.
Originality/value
This paper reveals the interaction between two major governance variables in affecting firm valuation.
Keywords
Citation
Huang, H., Wang, Q. and Zhang, X. (2009), "The effect of CEO ownership and shareholder rights on cost of equity capital", Corporate Governance, Vol. 9 No. 3, pp. 255-270. https://doi.org/10.1108/14720700910964325
Publisher
:Emerald Group Publishing Limited
Copyright © 2009, Emerald Group Publishing Limited