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Article
Publication date: 3 December 2018

William Coffie, Ibrahim Bedi and Mohammed Amidu

This paper aims to investigate the effects of audit quality on the cost of capital in Ghana.

Abstract

Purpose

This paper aims to investigate the effects of audit quality on the cost of capital in Ghana.

Design/methodology/approach

Non-financial firms listed on the Ghana Stock Exchange (GSE) as well as non-listed firms from the database of Ghana Club 100 were included in the sample. Series are yearly, covering a sample of 40 firms during the six-year period, 2008-2013. The study employed the positivist research paradigm to establish the relationship between audit quality and the cost of capital.

Findings

There is evidence to suggest that the cost of debt and the overall cost of capital of firms in Ghana can be explained by the quality of the external auditors. The results also show that the large size of the board is associated with low cost of debt.

Research limitations/implications

The fact that the choice of quality measure is based on firm size only and other measurements of audit quality could not be measured. Future research may examine how other approaches to measuring audit quality affect cost of capital.

Practical implications

The results significant for those charged with assurance and regulation, as well as lenders and managers of companies.

Originality/value

The authors investigate how external auditing quality affects the cost of capital of firms operating in Ghana.

Details

Journal of Financial Reporting and Accounting, vol. 16 no. 4
Type: Research Article
ISSN: 1985-2517

Keywords

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Article
Publication date: 12 July 2021

Rim Zouari-Hadiji and Yamina Chouaibi

This paper aims to examine the effect of the corporate ethical approach on the cost of equity capital. This study is conducted on a large international sample on behalf of

Abstract

Purpose

This paper aims to examine the effect of the corporate ethical approach on the cost of equity capital. This study is conducted on a large international sample on behalf of the world’s most engaged firms from an ethical point of view in 2015.

Design/methodology/approach

The multivariate linear regression model is used to meet the purpose of this study and research hypotheses are also examined using a sample of 80 of most ethical firms in the world during the year 2015. Moreover, three variables (i.e. business ethics, corporate social responsibility and executive compensation based on the achievement of sustainable development goals) are used to reflect the corporate ethical approach and the implied cost of equity capital is used for estimating the cost of equity. In this regard, equity cost estimation is the most appropriate approach to test the effect of business ethics on the cost of financing firms.

Findings

Based on a sample of 80 firms emerging as the world’s most ethical firms in 2015, the results revealed that firms with better ethics scores are significantly associated with a reduced cost of equity capital. This paper also demonstrates that the executive incentive pays that are based on the objectives of sustainable development are able to explain different outcomes regarding the relation between corporate ethical behaviors and the cost of equity. These findings support arguments in the literature that firms with socially responsible practices have a higher valuation and lower risk.

Originality/value

This study provides implications for global regulators and policymakers when setting social reporting standards, suggesting that corporate ethical engagement reduces the cost of equity capital by decreasing the information asymmetry and thereby reducing the firms’ risk. Therefore, the findings may be informative to international managers and investors when considering the effect of business ethics on the firm’s ex-ante cost of equity. In this perspective, the voluntary disclosure of information makes it possible to mitigate the problems of asymmetry of information and conflict of interest between the firm and its main providers of capital, which could reduce the cost of equity.

Details

Journal of Financial Reporting and Accounting, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1985-2517

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Article
Publication date: 17 April 2020

Saad Faysal, Mahdi Salehi and Mahdi Moradi

The purpose of this study is to cover the ownership structure as (institutional ownership and managerial ownership) influencing the cost of equity in emerging markets.

Abstract

Purpose

The purpose of this study is to cover the ownership structure as (institutional ownership and managerial ownership) influencing the cost of equity in emerging markets.

Design/methodology/approach

The authors applied the regression model with the fixed-effect model in the data. Data collected from listed companies in the Iraq-Iran Stock Exchange during 2012-2017.

Findings

The authors found a significant positive associated between institutional ownership and the cost of equity in the Iranian and Iraqi contexts. The results also reveal a significant negative associated between managerial ownership with the cost of equity in the Iranian and Iraqi contexts. This means that when managerial ownership is increased, the cost of equity will be reduced. These results support the role of inside ownership to enhance fixed performance by reducing the cost of equity. So, managerial ownership can be a substitute for all shareholders. Moreover, the results indicate a similarity in the impact of the ownership structure on the cost of equity in the Iraqi and Iranian context, this means the similar elements among west Asian countries.

Research limitations/implications

Financial companies such as banks and investment companies were not listed due to the difference in the nature of their work with the other sectors in the Iranian and Iraqi stock exchanges. Moreover, the authors are heavily constrained as listed companies must continue during the study period to calculate the cost of equity. Therefore, the results are difficult to generalize widely.

Practical implications

This international study will enable investors in, as well as local and international investors to take the appropriate investment decision-making in the capital markets in these countries (Iraq and Iran). Moreover, it contributes significantly to helping corporate governance bloggers in Iraq and Iran understand the role of the ownership structure in corporate governance.

Originality/value

This is the first study of the interaction between institutional ownership, managerial ownership with the cost of equity in Iraq, the study will help complete the knowledge gap with developed markets. The results are important in future research because the authors believe that it is very important for the future to look at better for percentage levels of institutional and managerial ownership in the company ownership. Although the contribution is limited, it will provide a useful guide for more papers in other west Asian countries.

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Article
Publication date: 19 April 2013

Bill Dimovski

This is the first REIT paper to seek to empirically examine potential influencing factors on the discounts and underwriting fees of Australian REIT rights issues.

Abstract

Purpose

This is the first REIT paper to seek to empirically examine potential influencing factors on the discounts and underwriting fees of Australian REIT rights issues.

Design/methodology/approach

Using a methodology similar to Owen and Suchard, and Armitage, a sample of 62 A‐REIT rights issues during 2001‐2009 is analyzed. A variety of potential factors influencing discounts and underwriting fees are explored.

Findings

Over A$20 billion was raised by A‐REIT rights issues during 2001‐2009 (this around three times that raised through A‐REIT initial public offerings during the same period). The mean offer price was discounted around 9.5 percent from the current market price and underwriting fees averaged 2.9 percent of gross proceeds raised – both substantially less than for industrial rights issues. The standard deviation of daily returns for the past year appears to influence the percentage discount offered to subscribers. This volatility was particularly noticeable in 2008 and 2009, during the global financial crisis, where new issues were discounted substantially so as to raise equity to repay debt. This historical risk variable appears paramount in determining the discounts to subscribers and fees to underwriters.

Practical implications

A‐REITs seeking to minimize the discounts offered to subscribers and to minimize their underwriting costs with rights issue equity capital raisings must first minimize their share price volatility.

Originality/value

This paper adds to the international costs of capital raising literature of REITs by examining such costs with A‐REIT rights issues and is the first paper to examine factors influencing these costs.

Details

Journal of Property Investment & Finance, vol. 31 no. 3
Type: Research Article
ISSN: 1463-578X

Keywords

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Article
Publication date: 1 April 1987

Norman Gross

Let me start out by describing my relationship with International Harvester—so my biases will be clear. In 1972, I directed a review of the business planning procedures at…

Abstract

Let me start out by describing my relationship with International Harvester—so my biases will be clear. In 1972, I directed a review of the business planning procedures at International Harvester for Hay Associates. Perhaps the most important observation I made then was that for a good many years International Harvester had been and still was in the process of “liquidation.” That is, year after year the company earned a return lower than the cost of capital.

Details

Planning Review, vol. 15 no. 4
Type: Research Article
ISSN: 0094-064X

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Article
Publication date: 15 March 2021

Renato Garzón Jiménez and Ana Zorio-Grima

Corporate social responsibility (CSR) actions are expected to reduce information asymmetries and increase legitimacy among the stakeholders of the company, which…

Abstract

Purpose

Corporate social responsibility (CSR) actions are expected to reduce information asymmetries and increase legitimacy among the stakeholders of the company, which consequently should have a positive impact on the financial conditions of the firm. Hence, the objective of this paper is to find empirical evidence on the negative relationship between sustainable behavior and the cost of equity, in the specific context of Latin America. To address this issue, some proxies and moderating variables for sustainability are used in our study.

Design/methodology/approach

The regression model considers a sample with 252 publicly trading firms and 2,772 firm-year observations, from 2008 to 2018. The generalized method of moments is used to avoid endogeneity problems.

Findings

The study finds evidence that firms with higher environmental, social and governance activities disclosed by sustainability reports and assured by external providers decrease their cost of equity, especially if they are in an integrated market as MILA. This finding confirms that agency conflicts between firm's management and stakeholders diminish with higher CSR transparency, leading to a lower cost of capital.

Originality/value

Our research is unique and valuable as, to our knowledge, it is the first study to analyze the impact of sustainable behavior and the cost of equity from companies operating in Latin America.

Propósito

Las actividades de Responsabilidad Social Empresarial permiten disminuir asimetrías de información e incrementar la legitimidad ante los stakeholders de una empresa, generando impactos positivos financieros para la misma. De hecho, el objetivo del artículo es medir la relación entre el comportamiento sostenible y el Costo de Capital en el contexto empresarial latinoamericano. Para ello, consideramos algunas variables proxy y moderadoras sustentables en nuestro estudio.

Diseño/Metodología/Enfoque

El modelo considera una muestra de 252 empresas cotizadas y 2772 observaciones que abarcan el período de 2008 a 2018. Se implementa el Modelo Generalizado de Momentos para evitar problemas de endogeneidad.

Resultados

Los autores evidencian que empresas con altos niveles de divulgación ambiental, social y gobernanza corporativa a través de reportes de sostenibilidad y asegurados por proveedores externos disminuyen el Costo de Capital, especialmente si cotizan en un mercado integrado como el MILA. Estos hallazgos confirman que se reduce la asimetría de información entre la gerencia y los stakeholders, dado que incrementa la transparencia mediante la Responsabilidad Social Corporativa y ello conduce a un menor Costo de Capital.

Originalidad/Valor

Nuestro estudio es único dado que, hasta la fecha, es el primer estudio que analiza el impacto de la divulgación voluntaria de RSE y Costo de Capital de empresas que operan en Latinoamérica.

Details

Academia Revista Latinoamericana de Administración, vol. 34 no. 2
Type: Research Article
ISSN: 1012-8255

Keywords

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Article
Publication date: 8 June 2021

Ismail Kalash

The purpose of this study is to investigate the effect of environmental performance on the capital structure and financial performance of Turkish listed firms.

Abstract

Purpose

The purpose of this study is to investigate the effect of environmental performance on the capital structure and financial performance of Turkish listed firms.

Design/methodology/approach

This study used data of 49 firms listed on Istanbul Stock Exchange during the period between 2014 and 2019, resulting in 205 firm-year observations. The environmental performance data were drawn from the carbon disclosure project Turkey climate change reports. Ordinary least squares and binary logistic regression models were used to examine whether environmental performance impacts the capital structure and financial performance.

Findings

The findings of this research revealed that environmental performance significantly positively affects the firm leverage. Findings also showed that environmental performance has a significantly positive impact on return on assets, operating profitability and return on equity, but no significant impact on stock returns.

Practical implications

Given the increased borrowing costs for Turkish firms after the 2018 currency crisis in Turkey, the findings of this study are very important as they enable managers of Turkish firms to make better decisions related to capital structure and to understand the role of environmental performance in reducing the cost of debt and enhancing financial performance.

Originality/value

To the author’s knowledge, this research is the first to investigate the effect of environmental performance on capital structure in the Turkish context, and is one of few that explained how environmental performance affects the financial performance of Turkish firms.

Details

Society and Business Review, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-5680

Keywords

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Article
Publication date: 12 February 2018

Varnita Srivastava, Niladri Das and Jamini Kanta Pattanayak

This paper aims to explore the relationship of corporate governance attributes with cost of capital and firm performance. This paper also tries to find some widely…

Abstract

Purpose

This paper aims to explore the relationship of corporate governance attributes with cost of capital and firm performance. This paper also tries to find some widely discussed corporate governance attributes that hold importance in Indian context.

Design/methodology/approach

This paper is based on literature survey of 241 research papers, both conceptual and empirical, which covers literature published over a period of three decades, ranging from 1986 to 2016. The literature includes those papers that studied the relation of corporate governance with cost of capital and firm performance, also it includes those research papers which discuss the evolution and development of corporate governance as a concept.

Findings

This study finds that the idea of corporate governance has shifted from the protection of shareholders’ rights to a firm’s need for survival. There is a dearth of literature studying the relation between corporate governance and cost of capital in India. It is observed that cost of capital is a better measure than Tobin’s q in Indian context.

Research limitations/implications

This paper mainly focuses on themes like cost of capital and firm performance therefore, some other firm-related measures which are also influenced by corporate governance may have been ignored.

Originality/value

This study enhances the literature on corporate governance especially in Indian context. Empirically testing the framework developed in this study will help in identifying the significance of various corporate governance attributes in Indian context.

Details

International Journal of Law and Management, vol. 60 no. 1
Type: Research Article
ISSN: 1754-243X

Keywords

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Article
Publication date: 1 August 1994

Lewis D. Johnson and Edwin H. Neave

This paper uses a transactions economics theory of financial governance to reconcile and integrate the evidence on inter‐ and intra‐country differences in corporate…

Abstract

This paper uses a transactions economics theory of financial governance to reconcile and integrate the evidence on inter‐ and intra‐country differences in corporate finance and corporate governance. We argue that one reason for the competitive advantage demonstrated by Japan in recent years is Japan's greater use of high capability financial governance and its consequent reduction of risks that would otherwise be borne.

Details

Managerial Finance, vol. 20 no. 8
Type: Research Article
ISSN: 0307-4358

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Case study
Publication date: 13 December 2019

Eduardo Luis Montiel and Octavio Martinez

These are the three most important learning outcomes: discuss the relevance of capital asset pricing model (CAPM) as the methodology to estimate the cost of equity for an…

Abstract

Learning outcomes

These are the three most important learning outcomes: discuss the relevance of capital asset pricing model (CAPM) as the methodology to estimate the cost of equity for an investment in an emerging market; analyze the different alternatives to estimate country risk discussing the pros and cons of each. Consider the additional complexity in estimating the cost of equity, contrasting the perspective of a local, non-diversified investor with that of a multinational company operating in 39 countries.

Case overview/synopsis

The Chief Financial Officer of a business group has to determine the correct discount rate for an investment in a new hotel in Guayaquil, Ecuador. The group has traditionally used the same discount rate for all projects and is now presented with several alternatives by his team. Estimating the correct country risk adjustment for the project is an important challenge. He knows that there is no clear solution to this challenge that is accepted by all practitioners and academics, but he has to present a recommendation to the board.

Complexity academic level

The case study is designed for corporate finance, appraisal or international finance courses in both MBA and executive training programs. To discuss this case study, students are assumed to have been already exposed to the weighted average cost of capital and the CAPM.

Supplementary materials

Teaching Notes are available for educators only. Please contact your library to gain login details or email support@emeraldinsight.com to request teaching notes.

Subject code

CSS 1: Accounting and finance.

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