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

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 CG-medium ownership group. Nonetheless, pool and large Cap firms in the high CG predominant 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 CG-medium 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 CG-predominant ownership group. Practical Implication: There are significant academic and practical implications which are briefly described in last part of the study.