Does investor base affect the firm-level ex-ante cost of equity capital?

Abstract

This research investigates how investor base affects the cost of equity capital (COE) in Indian companies, particularly in market conditions with weak investor protection and increased ownership concentration by promoters and families. Using ordinary least squares (OLS), panel fixed effects, and two-step system generalised method of moments (GMM) analysis on data spanning from 2016 to 2021, we discovered that a dispersed ownership structure is linked to a higher ex-ante COE. Our findings indicate that companies with dispersed shareholders have less motivation to monitor managers, which leads to the expropriation of minority shareholders and results in higher COE.

Keywords

• Ex-ante cost of capital
• Implied cost of equity capital
• Investor base
• Firm value and agency cost