Firm Competitiveness: An Examination of the Role of Corporate Governance in Defining Cost of Capital

Abstract

This paper discusses the influence of Corporate Governance (CG) on Cost of Capital (CoC). The study revolves on the hypothesis that optimum capital structure at minimum cost is also an agenda item of CG. Thus this study explores the influence of CG on overall cost of capital as well as at its components level. The main goal is to prove that with improvement in CG performance, leads to reduction in information asymmetry among principal and agents, enabling agency cost to decline resulting in resetting guidance for required returns for equity and debt to a lower level. Main attention was paid to nature of correlation and OLS based econometric modelling of WACC to identify the lead indicators CG should influence to create an impact. This topic was chosen on the assumption that CG has a role to play in enabling financial competitiveness for the firm to fuel its ambitious growth path. The major findings of the paper are, there exist no statistically significant differences existing among the means for CoC among the CG categories, and with rise in CG, and required return on equity and required return on debt are declining by the direction of correlation. However, in CGPI category 1, study finds required return on debt rising as a possible outcome of corporate strategies in those companies. The above findings suggest that the implications on the CoC on the whole is an outcome of the strategy implementation which is a byproduct of CG performance. Overall, study concludes that there is a reduction in CoC with rise in CG performance.