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Title: Property Theft and the Cost of Equity Capital

Citation Type: Miscellaneous

Publication Year: 2013

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Abstract: We study how a large and overlooked source of business risk that costs firms and investors billions of dollars annuallythe risk of property theftimpacts a firms cost of equity capital. We hypothesize that a firm with a greater exposure to the risk of property theft has higher cash flow risk and lower expected cash flows, which results in a higher cost of equity. To test this hypothesis, we exploit variation in state-level property crime rates as a source of changes in a firms exposure to the risk of property theft. Consistent with our hypothesis, we find that a firm located in an area with a higher property crime rate has a higher cost of equity, especially when individuals have greater incentives and opportunities to steal from the firm. Additional analyses help rule out the alternative explanation that omitted variables related to overall criminal activity, local economic conditions, and characteristics of local labor markets drive our findings. Lastly, we provide evidence that a firm located in a more crime ridden area also has a higher cost of bank debt. Overall, our paper shows that a firms exposure to the risk of property theft can have an economically important impact on its financing costs.

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Authors: Brushwood, James D.; Fairhurst, Douglas D.; Serfling, Matthew A.; Dhaliwal, Dan S.

Publisher: University of Arizona

Data Collections: IPUMS CPS

Topics: Crime and Deviance

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