Corporate Governance Quality and Cost of Equity in Financial Companies

Massimo Regalli, Maria-Gaia Soana
2012 International Journal of Business Administration  
There are many studies demonstrating how good corporate governance positively affects the economic-financial performance of companies, but few which examine the relationship between corporate governance and cost of equity capital. These mainly focus on multiple industries, and suggest that there are positive shareholder value implications for firms with stronger corporate governance mechanisms. This paper investigates the relationship between the quality of governance and the cost of equity in
more » ... inancial companies. It finds that financial companies with the best governance (both "internal" and "external") are associated with a higher cost of equity capital. These indices have mainly served to study the relationship between the quality of governance and the economic and financial performance of companies, represented by such variables as Tobin's Q, profitability ratios, or market performance indicators. Many studies refer to the US market and identify a statistically significant positive relationship between the two variables (Gompers et al., 2003; Brown and Cayrol, 2006; Bebchuk et al., 2009) , although in some cases their evidence is not clear (Bauer et al., 2004; Cremers and Nair, 2005) . Empirical analyses made on a sample of European enterprises give uneven results (Drobetz et al.
doi:10.5430/ijba.v3n2p2 fatcat:rluiojhcencl7nvikkcf7u3bva