Customer Referencing and Capital Market Benefits: Evidence from the Cost of Equity

Rank and file employees execute firms’ daily operating activities, but prior research rarely examines their importance due to a lack of employee information. In this article, we use a novel data set—company reviews by rank and file employees—to provide evidence on the impact of employee satisfaction on a firm’s cost of equity capital. We find that firms with higher employee satisfaction have a lower cost of equity. Our results are robust to a variety of endogeneity tests and model specifications. We also find that the effect of employee satisfaction is more pronounced for firms with higher risk, greater financial constraints, and higher labor intensity or product market competition where labor is more critical to firm success. Further analysis shows that the negative association between employee satisfaction and the cost of equity is primarily grounded in reviews from current rather than former employees. Finally, we document that firms with high employee satisfaction experience lower systematic and idiosyncratic risk. Overall, our article presents novel evidence on the capital market benefits of higher employee satisfaction, particularly with regard to financing cost reduction.

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Information risk, cost of equity and stock returns: evidence from Iranian firms

Journal of Financial Reporting and Accounting ◽

10.1108/jfra-01-2021-0025 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Ahmad Abdollahi ◽

Mehdi Safari Gerayli ◽

Yasser Rezaei Pitenoei ◽

Davood Hassanpour ◽

Fatemeh Riahi

Keyword(s):

Stock Returns ◽

Capital Market ◽

Cost Of Capital ◽

Positive Impact ◽

Stock Exchange ◽

Cost Of Equity ◽

Content Type ◽

Information Risk ◽

The Cost ◽

The Impact

Purpose A long history of literature has considered the role of information risk in determining the cost of equity. The question that has remained unanswered is whether information risk plays any systematic role in determining the cost of equity. One of the fundamental decisions that every business needs to make is to assess where to invest its funds and to re-evaluate, at regular intervals, the quality of its existing investments. The cost of capital is the most important yardstick to evaluate such decisions. Greater information is associated with the lower cost of capital via mitigating transaction costs and/or reducing estimation risk and stock returns. This study aims to investigate the impact of information risk on the cost of equity and corporate stock returns. Design/methodology/approach The research sample consists of 960 firm-year observations for companies listed on the Tehran Stock Exchange from 2009 to 2018. The research hypotheses were tested using multivariate regression models based on panel data. Findings The results reveal that information risk has a significant positive impact on the firm’s cost of equity. However, the impact of information risk on stock returns is not statistically significant. Originality/value To the best of the knowledge, the current study is almost the first of its kind in the Iranian literature which investigates the subject matter; therefore, the findings of the study not only extend the extant theoretical literature concerning the information risk in developing countries including the emerging capital market of Iran but also help investors, capital market regulators and accounting standard setters to make timely decisions.

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CSR and cost of capital: evidence from Japan

Social Responsibility Journal ◽

10.1108/srj-10-2016-0170 ◽

2017 ◽

Vol 13 (4) ◽

pp. 798-816 ◽

Cited By ~ 9

Author(s):

Megumi Suto ◽

Hitoshi Takehara

Keyword(s):

Ownership Structure ◽

Capital Market ◽

Cost Of Capital ◽

Corporate Social Performance ◽

Weighted Average ◽

Cost Of Debt ◽

Cost Of Equity ◽

Content Type ◽

Stakeholder Relationships ◽

The Cost

Purpose This study aims to examine the link between corporate social performance (CSP) and the cost of capital of Japanese firms in 2008-2013, considering the influences of banking relationships and ownership structure. Design/methodology/approach It examines the relation between CSP and the cost of capital in terms of the cost of debt, cost of equity and weighted average cost of capital, using a composite CSP measure based on stakeholder relationships. A regression model is adopted, controlling for bank dependency, ownership structure and firm-specific attributes. Findings Institutional ownership influences the CSP–cost of equity relation and reduces the cost of equity, while CSP is perceived by debtors as not information-mitigating for the observed period. For 2008-2010, the relation between CSP and bank dependency increases the cost of debt; however, the positive influence of bank dependency on the cost of debt dilutes during 2010-2013 as the shift to a more market-oriented financial market in Japan occurs. Practical implications Although bank borrowing is important, especially for small firms, non-financial disclosure makes external financing more flexible. Institutional investors concerned about the non-financial aspects of business, therefore, play an important role in mitigating the information asymmetry that exists in the capital market. Originality/value This study extends research on the CSP–cost of capital link by considering structural changes in financial systems (e.g. capital market perception of CSP and banks as delegated monitors).

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ESTIMATING THE COST OF EQUITY IN THE BALTIC REGION

Ekonomika ◽

10.15388/ekon.2010.0.976 ◽

2010 ◽

Vol 89 (3) ◽

pp. 40-54 ◽

Cited By ~ 3

Author(s):

Samuel Mongrut ◽

Arvydas Paškevičius ◽

Petras Dubinskas ◽

Renata Kovalevskaja ◽

Darcy Fuenzalida

Keyword(s):

Capital Market ◽

Financial Liberalization ◽

Cost Of Equity ◽

Baltic Region ◽

Industry Sector ◽

Baltic Countries ◽

The World ◽

The Baltic ◽

The Cost ◽

Political Turmoil

During the last two decades the Baltic region has been subject to several episodes of investment volatility and political turmoil. Although financial liberalization processes undertaken in these countries could reduce the cost of equity, it seems that investors have been cautious in investing in the Baltic region. In this research, we estimate the cost of equity per industry sector in three Baltic countries (Estonia, Lithuania and Latvia) during the period 2005–2008 and conclude that the cost of equity seems to have increased during the period 2005–2007, indicating that the region was less financially integrated with the world capital market.

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Employee Stock Ownership and the Cost of Equity in Japanese Electronics Firms

Organization Studies ◽

10.1177/017084069001100302 ◽

1990 ◽

Vol 11 (3) ◽

pp. 353-372 ◽

Cited By ~ 9

Author(s):

Jay B. Barney

Keyword(s):

Capital Market ◽

Lower Cost ◽

Conflicts Of Interest ◽

Equity Capital ◽

Stock Ownership ◽

Cost Of Equity Capital ◽

Cost Of Equity ◽

Employee Stock Ownership ◽

The Cost ◽

Empirical Implications

Conflicts of interest between a firm's outside stockholders and employees will, in an efficient capital market, be reflected in a firm's cost of equity. Employee stock ownership reduces these conflicts by making the wealth of both outside stock holders and employees depend, to some extent, on the market value of a firm's stock. These reduced conflicts will, in an efficient capital market, be reflected in a lower cost of equity capital. Empirical implications of this argument are tested using a sample of Japanese electronics firms.

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