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http://dx.doi.org/10.15207/JKCS.2019.10.8.217

The Effect of Wedge on Implied Cost of Equity  

Choi, Dong-Kwon (College of Business Administration, Chonnam National University)
Choi, Sungho (College of Business Administration, Chonnam National University)
Publication Information
Journal of the Korea Convergence Society / v.10, no.8, 2019 , pp. 217-226 More about this Journal
Abstract
This study examines the effect of the wedge between voting rights and cash flow rights of controlling shareholders on the implied cost of equity. Prior studies posit that controlling shareholder's voting rights exceeding cash flow rights causes expropriating minority shareholders. Using date from 793 group-affiliated Korean firms for 10 years from 2005 to 2016, the result shows that there is a positive and significant relationship between controlling shareholders' wedge and implied cost of equity. This result implies that investors regard the controlling shareholders' wedge as potential agency cost in which they require additional risk premium because controlling shareholders have a strong incentive to pursue their private interests trough tunneling practices.
Keywords
Wedge; Voting Rights; Cash Flow Rights; Implied Cost of Equity; RIM;
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