Property Rights Protection and the Cost of Equity Capital

The Property Law of the People's Republic of China (hereinafter, ‘the Property Law’) clarifies property ownership and strengthens property rights protection, thereby exerting profound effects on corporate financing and economic activities. Using the implementation of the Property Law as an exogenous shock, this study examines its impact on firms’ cost of equity capital (CEC) and the underlying mechanisms. We find that the implementation of the Property Law significantly reduces firms’ CEC. This effect is more pronounced in regions with weaker property rights protection and among firms facing greater external environmental uncertainty, lower executive ownership and higher fixed‐asset intensity. Further analyses reveal that the Property Law reduces the CEC by strengthening property rights protection and lowering firm risk. This study contributes to the literature by extending research on the economic consequences of the Property Law from debt financing to equity financing and by identifying property rights protection as an important institutional determinant of the CEC. Furthermore, this study develops a heterogeneity analysis framework based on three dimensions, external uncertainty, internal governance and asset characteristics, thereby providing a more comprehensive understanding of the impact of property rights protection on the CEC.