Cost of Equity, Control Divergence, and Institutions Authors Teresa Chu University of Macau In-Mu Haw Texas Christian University Lee-Seok Hwang Seoul National University Woody Wu Chinese University of Hong Kong Discussant Wen-I Chuang National Taiwan University of Science and Technology 2008 NTU International Conference on Finance

2008 NTU International Conference on Finance Main Focus This paper attempts to provide empirical evidence on the role of ultimate ownership structure in explaining the variations in firms’ cost of equity capital across 21 countries. 2008 NTU International Conference on Finance

2008 NTU International Conference on Finance Three Contributions First, this study provides direct empirical evidence on the relation between the ownership-control divergence and the cost of equity capital. 2008 NTU International Conference on Finance

2008 NTU International Conference on Finance Three Contributions Second, this study uses the firm-level data for both the equity cost and the divergence between ownership and control rights. The firm-level data are expected to better explain the variations in the cost of equity capital worldwide. 2008 NTU International Conference on Finance

2008 NTU International Conference on Finance Three Contributions Third, this study examines both the internal and external forces influencing the cost of equity capital. 2008 NTU International Conference on Finance

2008 NTU International Conference on Finance Major Comment The paper is in a good shape. The literature review is well done. The sample selection is well described. The hypotheses are well developed. The empirical tests are well conducted. 2008 NTU International Conference on Finance

Other Comments Which one is more important in explaining the variations in the cost of equity capital? Standardize the DIV (the entrenchment effect) and CASH (the incentive alignment effect) variables and compare the magnitudes of the absolute values of their coefficients by testing the null hypothesis that they are equal.

2008 NTU International Conference on Finance Other Comments Is there a nonlinear relationship between DIV (the entrenchment effect) and the cost of equity capital? The theoretical model of Stulz (1988) predicts a concave relationship between managerial equity ownership and firm value. Prior empirical studies find a nonlinear relationship between managerial equity ownership and firm value for U.S. firms (e.g., Morck et al. (1988)). 2008 NTU International Conference on Finance

2008 NTU International Conference on Finance Other Comments About 60% of the firms have zero divergence (DIV). Do the results become better or worse if these firms are excluded from the sample? 2008 NTU International Conference on Finance

2008 NTU International Conference on Finance Other Comments One interesting extension: Examine the hypotheses conditional on the type of owner. Families, the state, widely held corporations and widely held financial institutions Claessens et al. (2002) find that the wedge between control and ownership is associated with value discounts for family- and state-controlled firms, but for other types of owner. 2008 NTU International Conference on Finance

2008 NTU International Conference on Finance Other Comments Table 5: Conclusions about the differences in the cost of equity capital effects conditional on the legal institutional variables (DISRE and SECRE). Footnote 14: no significant differences (measured by the t-statistics) in DIV between sub-samples when the sample firms are partitioned based on DISRE and SECRE. 2008 NTU International Conference on Finance