Article | Open Access | Published: 11 June 2016
The Impact of Corporate Governance on Cost of Capital: The Case of Small, Medium, and Large CAP Firms
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Abstract:
This study is an empirical examination of the argument that higher Corporate Governance (CG) is associated with decreased cost of capital. The sample of the study comprised of 200 small, medium, and large corporate firms listed at the Pakistan Stock Exchange. The results reveal that CG and cost of capital are negatively correlated in large, medium, and small Cap firms. The result confirms the theoretical proposition of the agency theory that investors will be willing to accept a lower risk premium if firms have robust oversight mechanisms to curb managerial opportunism. In the case of an interaction effect, the results show that in a medium Cap firms investors demand the lower cost of capital from a high CG-medium ownership group. Nonetheless, pool and large Cap firms in the high CG predominant ownership group category pay the higher cost of capital. The result also indicates that large and small Cap firms as compare to medium Cap firms in the low CG-medium ownership category pay the higher cost of capital. Further, it appears that investors demand a higher cost of capital from the pool and small Cap firms in low CG-predominant ownership groups. There are significant academic and practical implications which are briefly described in the last part of the study.
Keywords:
Corporate governance, insider ownership, Pakistan stock exchange, asymmetric information, cost of capital, firm-level panal data, System GMM
Publisher:
ILMA UNIVERSITY
Published:
11 June 2016
Issue:
Issue 1 : Volume 12
E-ISSN:
2409-6520
P-ISSN:
2414-8393
This is an open access article distributed under the terms of the Creative Commons Attribution CC BY 4.0 license, which permits any use, distribution, and reproduction of the work without further permission provided the original author(s) and source are credited.