The relation between excess control and cost of capital
International Journal of Managerial Finance
ISSN: 1743-9132
Article publication date: 28 January 2014
Abstract
Purpose
The purpose of this study is to investigate the relationship between dominant shareholders, whose voting rights exceed cash flow rights (excess control), and firms’ cost of capital, including both equity capital and debt.
Design/methodology/approach
This research is conducted in Canada over a four-year period from 2002 to 2005 and uses panel data of 155 S&P/TSX firms. The weighted average cost of capital is regressed on excess control using fixed-effect regressions in a two-stage least squares framework.
Findings
The paper finds evidence that the cost of capital increases with excess control. The paper also confirms that for firms incorporated under the less protective Quebec incorporation law the excess control and, therefore, cost of capital is higher than for firms incorporated in the other provinces under the common law regime.
Originality value
Prior work examined the relationship between excess control and firm value, mostly Tobin's Q. By using cost of capital, the study explores another channel through witch excess control may affect firm value.
Keywords
Citation
Bozec, Y., Laurin, C. and Meier, I. (2014), "The relation between excess control and cost of capital", International Journal of Managerial Finance, Vol. 10 No. 1, pp. 93-114. https://doi.org/10.1108/IJMF-12-2010-0095
Publisher
:Emerald Group Publishing Limited
Copyright © 2014, Emerald Group Publishing Limited