THE IMPACT OF CORPORATE GOVERNANCE ON COST OF CAPITAL: THE CASE OF SMALL, MEDIUM, AND LARGE CAP FIRMS

Sajid Gul (), Abdul Rashid () and Faqir Muhammad ()

IBT Journal of Business Studies (JBS), 2016, vol. 12, issue 1, 247-271

Abstract: Purpose This study is an empirical examination of the argument that higher Corporate Governance CG is associated with decreased cost of capital.Methodolgy The sample of the study comprise of 200 small, medium, and large corporate firms listed at the Pakistan Stock Exchange.Findings The results reveal that CG and cost of capital is 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 case of interaction effect the results show that in medium Cap firm’s investors demand lower cost of capital from high CGmedium ownership group.Nonetheless, pool and large Cap firms in the high CGpredominant ownership group category pay higher cost of capital.The result also indicates that large and small Cap firms as compare to medium Cap firms in low CGmedium ownership category pay higher cost of capital.Further, it appears that investors demand higher cost of capital from pool and small Cap firms in low CGpredominant ownership group.Practical Implication There are significant academic and practical implications which are briefly described in last part of the study

Keywords: Corporate governance; insider’s ownership; Pakistan stock exchange; asymmetric information; cost of capital; firm-level panal data; System GMM (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:aib:ibtjbs:v:12:y:2016:i:1:p:247-271

DOI: 10.46745/ilma.ibtjbs.2016.121.16

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