Review of Quantitative Finance and Accounting

, Volume 43, Issue 3, pp 483–527 | Cite as

Cost of equity capital, control divergence, and institutions: the international evidence

  • Teresa Chu
  • In-Mu Haw
  • Bryan Byung-Hee Lee
  • Woody Wu
Original Research


This study investigates the governance role of a country’s legal and extra-legal institutions in explaining the variations in firms’ cost of equity capital induced by concentrated ownership structures from 21 countries. Using four implied cost of equity proxies, the results show that the large ownership-control divergence of the ultimate owner has a positive and significant impact on the firm’s cost of equity capital. The finding lends support to the entrenchment effect in that the concentrated ownership structure increases the firm’s external financing cost. Further analyses demonstrate that the higher equity cost induced by the ultimate ownership structure is significantly reduced by a country’s stronger legal and extra-legal institutions, highlighting the governance role played by a country’s institutions in reducing the firm’s external financing cost.


Corporate governance Ownership-control divergence Cost of equity capital Legal institutions Extra-legal institutions 

JEL Classification

G15 G30 G38 K22 



We appreciate the useful comments and suggestions of C.-F. Lee (Editor), anonymous reviewer, Joseph Fan, Larry Lang, T.J. Wong, and of participants at the 2010 European Accounting Association Annual Conference (Istanbul, Turkey), 2008 National Taiwan University International Conference on Finance (Taipei, Taiwan), and research seminars at the Chinese University of Hong Kong and the University of Macau. Professor Wu gratefully acknowledges the financial support from the Chinese University of Hong Kong through the Direct Allocation Grant (Project ID: 4057004).


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Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  • Teresa Chu
    • 1
  • In-Mu Haw
    • 2
  • Bryan Byung-Hee Lee
    • 1
  • Woody Wu
    • 3
  1. 1.Department of Accounting and Information Management, Faculty of Business AdministrationUniversity of MacauTaipaMacau
  2. 2.Department of Accounting, M.J. Neeley School of BusinessTexas Christian UniversityFort WorthUSA
  3. 3.Faculty of Business Administration, School of AccountancyThe Chinese University of Hong KongShatinHong Kong

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