The Relation between Excess Control and Cost of Capital Under Different Law Regimes

Prior empirical work examined the relationship between dominant shareholders, whose voting rights exceed cash flow rights, and firm value. In this study, we adopt a different perspective and argue that because of the risk imposed on minority shareholders and debtors, such excess control likely increases firms’ weighted-average cost of capital. We further argue that in legal environments that provide weak investor protection, the firms’ cost of capital is likely to be higher. Using panel data of 155 Canadian firms over a four-year period from 2002 to 2005, we find supporting evidence.