Shareholder Protection and the Cost of Capital

In this paper, we exploit the staggered adoption of universal demand (UD) laws in 23 states to identify a causal impact of shareholder protection laws on the implied cost of capital. Using public firms in the U.S. over 1985-2007, we find that weakened shareholder litigation rights induced by the UD laws lead to an increase in firms’ implied cost of capital. Further tests suggest that these heightened financing costs result from the increase in...