| Abstract: |
This paper calculates an implied cost of equity for 19 developed countries
from 1991 to 2006. During this period, there has been a decline in the cost of
equity of about 10-15 bps per year, which can be partially attributed to
declining government yields and declining inflation. Analyst forecast
inaccuracy, a proxy for firm-level earnings opacity, is positively related to
the cost of equity. If this variable captures differences in disclosure across
firms, then improvements in disclosure regulation may benefit firms by
lowering their cost of equity. I also include countrylevel variables that
measure disclosure requirements, director liability, and the ability for
shareholders to sue directors. Higher levels of these measures are associated
with a lower cost of equity. Previous studies [e.g., Hail and Leuz (2006a)]
have found a similar relation, but my study is unique in that it uses a
different measure of investor protection, which may better reflect regulatory
differences across countries, and it shows this relation holds for developed
countries. After controlling for the characteristics of firms that analysts
choose to cover in each country, differences in the properties of analyst
forecasts across countries, and differences in accounting standards across
countries, Canada’s cost of equity is statistically different from a handful
of countries and is about 20 to 40 bps higher than that of the United States.
Lowering Canadian firms' cost of equity by this amount would have large
economic benefits given the size of Canada's capital markets. |