The Impact of Corporate Governance on the Cost of Equity: Empirical Evidence from Pakistani Listed Companies

Syed Zulfiqar Ali Shah () and Safdar Ali Butt ()
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Syed Zulfiqar Ali Shah: Mohammad Ali Jinnah University, Islamabad.
Safdar Ali Butt: Mohammad Ali Jinnah University, Islamabad.

Lahore Journal of Economics, 2009, vol. 14, issue 1, 139-171

Abstract: This study examines the impact of the quality of corporate governance, as measured by a specially constructed corporate governance index, on the expected cost of equitycalculated using the capital asset pricing model (CAPM) approach. A total of 114 listed companies were investigated to analyze the relationship between the two variables for the period 2003 to 2007. The quality of corporate governance was measured by assigning weights to a set of related variables, although these variables were also considered individually. We used descriptive statistics, a correlation matrix, a simple ordinary least squares (OLS) approach, and fixed effect model to test the panel data collected. We found a negative relationship between managerial ownership and board size with the cost of equity, and a positive relationship between board independence, audit committee independence, and corporate governance with the cost of equity. These results could be due to the transition phase through which Pakistani companies are passing after the promulgation of the Code of Corporate Governance in 2002.

Keywords: Corporate governance; cost of equity; Pakistan. (search for similar items in EconPapers)
JEL-codes: G30 G34 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (7)

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