Wharton-SMU Research Center

In-House Seminar

Guest Speaker:

Christian Leuz
Assistant Professor of Accounting, The Wharton School, University of Pennsylvania

Topic:

International Differences in Cost of Capital: Do Legal Institutions and Securities Regulation Matter?

Chairperson:

Lim Kian Guan
Professor of Finance, School of Business, Singapore Management University

Venue:

Eu Tong Sen Building, Level 1, Seminar Room 2
Singapore Management University
469 Bukit Timah Road, Singapore 259756

Date:

Wednesday, 12 November 2003, at 4.00pm

Reservation:

This seminar is free. Places are limited. Please confirm your attendance by Tuesday, 11 November 2003, 12 noon with Ms. Prisiclla Cheng at priscillacheng@smu.edu.sg (telephone: 6822-0383) or Lim Lih Yeng at lylim@smu.edu.sg (telephone: 6822-0197).

About the Seminar:

This paper examines international differences in firms' cost of capital across 40 countries. We analyze whether the effectiveness of a country's legal institutions and securities regulation is systematically related to cross-country differences in the cost of capital, over and above traditional risk factors. We employ four different models using analyst forecasts to estimate firms' implied cost of capital. We find that countries with extensive securities and disclosure regulation and strong enforcement mechanisms exhibit lower levels of cost of capital than countries with weak legal institutions, even after controlling for various risk and country factors. The effects are strongest for institutions that enable investors to privately enforce their contracts, i.e., legal institutions that provide information and facilitate private litigation. We also show that, consistent with theory, these effects become substantially smaller or insignificant as markets become more integrated.