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Heterogeneity in the competition-cost of equity relation

Author

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  • Somé, Hyacinthe Y.
  • Valéry, Pascale

Abstract

We explore the effect of firm heterogeneity on the implied cost of equity. To this end, we exploit two opposing effects of competition on the cost of equity: its negative effect on a firm's exposure to systematic risk and its positive effect on a firm's agency costs when it acts as a managerial disciplining device. Using a U.S. sample comprising 4764 firms from 1986 to 2017, we find that, on average, competition reduces equity costs by diminishing managerial expropriation, but increases these costs for small and distressed firms as they are more exposed to systematic risk. This agency costs link holds in developed countries only.

Suggested Citation

  • Somé, Hyacinthe Y. & Valéry, Pascale, 2024. "Heterogeneity in the competition-cost of equity relation," International Review of Economics & Finance, Elsevier, vol. 95(C).
    • Handle: RePEc:eee:reveco:v:95:y:2024:i:c:s1059056024004787
    DOI: 10.1016/j.iref.2024.103486
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    Keywords

    Competition; Agency costs; Implied cost of equity; Firm size; Free cash flow;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

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