Corporate Governance and Cost of Equity: Evidence from Asian Countries

By Anwar, Zeshan; Asghar, Dr Muhammad Jam e. Kausar Ali et al. | Journal of Political Studies, Summer 2019 | Go to article overview

Corporate Governance and Cost of Equity: Evidence from Asian Countries


Anwar, Zeshan, Asghar, Dr Muhammad Jam e. Kausar Ali, Khan, Dr Muhammad Khalid, Danish, Dr Rizwan Qaiser, Journal of Political Studies


(ProQuest: ... denotes formulae omitted.)

Introduction

The high profile corporate failures and scandals, for example, Enron (US); WorldCom (US); Tyco (US); British and Commonwealth (UK); OneTel (Australia); Maxwell (UK); Parmalat (Italy) etc. occurred internationally stimulated the interest of academicians and practitioners for managing the situation through concentrating on corporate governance systems all around the globe. The need for more transparency and accountability in managing and controlling the organizations play an important role in firm performance. Therefore, several rules, regulations and laws were approved in different countries for controlling the corporate governance practices. There are several corporate governance theories and their link with wealth of shareholders is a general topic. For example, the Stewardship theory recommends that corporate governance is about maximization of shareholders wealth. This view might be very narrow but nonetheless, it stresses that corporate governance and wealth of shareholders are linked with each other. The cost of capital is a fundamental factor of wealth creation and debates regarding optimum capital structure relate capital structure with capital cost and wealth of shareholders. Up till now the relationship of corporate governance practices with cost of capital has not been sufficiently investigated.

Current study investigated the relationship of Corporate Governance (CG) with cost of equity by incorporating a sample of large multinationals in Asian countries. There are several theories which point out association of corporate governance with wealth of shareholders; whereas cost of equity is a fundamental factor of wealth creation (Rad, 2014). However, the relationship of governance practices with cost of equity has not sufficiently investigated for Asian countries; therefore, there is need for such kind of research.

This research empirically examines this issue by utilizing data from top multinational firms in Asian countries (e.g. Petr°China, Toyota Motor, Gazprom, Samsung Electronics, China Mobile etc.). This research builds on former research in many ways:

Firstly, majority of studies based on corporate governance focused on large and developed economies like UK, US and European economies. The emerging economies like Asian countries with substantial agricultural based industries may vary from developed economies. This investigation on Asian countries may enhance generalizability and understandability of the corporate governance relationship with cost of equity.

Secondly, this research provides several experiences related to governance activities and cost of equity as Asian countries are extremely different with respect to corporate legislations, capital structures and cost of equity.

The governance practices concentrates on characteristics of boards in organizations and as described by Castellano, (2000); the board directors has critical role in controlling and monitoring performance of managers as highlighted in several empirical studies (Teti et al. 2016; Bradley and Chen, 2014 and Hajiha et al. 2013). The matter of policy making relating to cost of equity for Asian companies has not been highlighted in previous discussions.

The better corporate governance mechanisms will assist in several ways: firstly, it will improve the confidence of local investors; secondly, reduces cost of equity; thirdly, reinforcing the better performance of financial markets and eventually encouraging more stable financing sources (The OECD, 2009). The businesses which depend on international financing have accessibility to a larger group of investors. So, if they desire to take benefits of bigger capital markets and want to decrease cost of equity, their governance mechanisms should be reliable, well understood globally and have worldwide agreed principles (Stulz, 2007).

Examining governance practices for decreasing the cost of equity has a significant importance. …

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