Why does investor protection matter for the cost of equity by M. Deniz Yavuz

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Why does investor protection matter for the cost
of equity?by M. Deniz Yavuz
DISCUSSIONby Hakan Orbay
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Gem of an Idea

• Why does expropriation effect cost of equity?

• Riskiness of cash flows change unless

• Suppose that E k,

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Expropriation matters

• Size of expropriation
• Increases leverage effect
• Correlation of expropriation and cash flows
• Negative correlation increases risk
• Positive correlation has a decreasing effect on re

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Investor Protection

• Reduces size of expropriation
• Does it effect the correlation?

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Puzzled

• What happened to systematic risk of actual cash
  flows? (proposition 2)

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A concern about scaling

• Betas are scaled by relative GDP and GDP
  volatility
• Firm level variables are used where scaled beta
  is the dependent variable

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Curious

• Positive effect of public enforcement
• Interaction of GDP per capita with a legal system
  proxy