Does the Cost of Capital Differ Across Countries? An Agency Perspective

In this keynote speech, I ask the question: Does the cost of capital differ for firms located in different countries? I argue that there are two ways to look at the cost of capital. First, there is the neo-classical perspective, which assumes that there are no agency problems. In integrated markets, the neo-classical cost of capital is the same in every country. Second, there is the agency perspective. Agency costs increase the cost of capital understood as the expected rate of return necessary for an investment to leave the value of the firm unaffected. Adjusting the cost of capital for agency costs, I argue that it differs across countries because of differences in corporate governance. I then provide a comparison of the agency-cost adjusted cost of capital between Japan and the U.S.