Managerial ability and cost of equity capital

Abstract

This study examines whether more capable 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 negative association between managerial ability and the cost of equity capital is more pronounced for firms with high information asymmetry among investors, with less institutional ownership, and with high capital intensity. The results are robust to a variety of sensitivity tests, including change specifications, an instrumental variable approach, and alternative measures of managerial ability.