AAA Spark Meeting of Regions

Managerial Characteristics and the Cost of Equity Capital: The Role of Managerial Ability

• In Event: Managerial Ability, Voluntary Disclosure and Managerial Characterisitcs

Abstract

This study examines whether more able managers affect the cost of equity capital. After controlling for standard risk factors and firm characteristics, we find that higher managerial ability is associated with a lower implied cost of equity. Moreover, our results show that the role of managerial ability is more important in reducing the cost of equity capital for firms with high information asymmetry among investors and with less institutional ownership. The results are robust in a variety of sensitivity tests, including change specifications and alternative measures of managerial ability. Overall, our findings suggest managers’ personal attributes, including managerial ability to influence the cost of equity capital.

Authors

• Heeick Choi, UMass Lowell

• Hyungtae Kim, California State University Fresno

• Soomi Jang, University of Massachusetts Lowell