When a firm issues stock in a country with weak laws on corporate disclosure and little legal protection for shareholders, the stock will generally be sold at a relatively ______ price, so the firm incurs a _____ cost of equity.
A) low; low
B) low; high
C) high; high
D) high; low

Question

When a firm issues stock in a country with weak laws on corporate disclosure and little legal protection for shareholders, the stock will generally be sold at a relatively ______ price, so the firm incurs a _____ cost of equity. ​
A) ​low; low
B) ​low; high
C) ​high; high
D) ​high; low

Quizplus · Accepted Answer

In countries with weak laws on corporate disclosure and little legal protection for shareholders, investors face higher risks. To compensate for these risks, investors will pay less for the stock, leading to a lower price. However, this means the firm has to offer more shares to raise the same amount of capital, or accept less capital for the same number of shares, resulting in a higher cost of equity.

When a Firm Issues Stock in a Country with Weak