International Journal of Financial Management

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Corporate Governance and Its Impact on Cost of Capital:Empirical Insights from Indian Listed Firms


Affiliations
1 Dept of Commerce, Pondicherry University, Pondicherry, India
2 Department of Management Studies, Pondichery University, Pondicherry, India
     

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To perpetuate in stiff competition of corporate race role of corporate governance in creating value for shareholders has got amplified thus has become the subject of intense interest in corporate finance research. The main objective of our study is to examine the effect of corporate governance mechanism on cost of capital in listed Indian firms and to determine vital areas in corporate governance which directly or indirectly contribute towards reducing capital cost of sample Indian listed firms. From sample of 270 NSE listed Indian firms for period of nine years ranging from 2007–08 to 2015–16, using OLS multiple regression model. The empirical support to the understanding that corporate governance reduce firms cost of finance is consistent in Indian weak legal corporate setting also. However, Board characteristics has been found ineffective in causing overall cost of capital and debt and equity as well. Moreover, board characteristics have also failed to significantly affect the cost of debt. Governance effectiveness in reducing cost of capital through board structure, activities and disclosures are supporting the argument that potential investors in equity and debtholders favor monitoring mechanisms that are likely to limit managerial opportunism and consider board monitoring effectiveness as a source of greater assurance and confidence boosting mechanism among suppliers of finance and other stakeholders as well.

Keywords

Cost of Capital, Disclosures, Board Activities, Structure and Characteristics.
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  • Corporate Governance and Its Impact on Cost of Capital:Empirical Insights from Indian Listed Firms

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Authors

Showkat Busru Ahmad Busru
Dept of Commerce, Pondicherry University, Pondicherry, India
G. Shanmugasundaram
Dept of Commerce, Pondicherry University, Pondicherry, India
Aamir Rashid Bhat
Department of Management Studies, Pondichery University, Pondicherry, India

Abstract


To perpetuate in stiff competition of corporate race role of corporate governance in creating value for shareholders has got amplified thus has become the subject of intense interest in corporate finance research. The main objective of our study is to examine the effect of corporate governance mechanism on cost of capital in listed Indian firms and to determine vital areas in corporate governance which directly or indirectly contribute towards reducing capital cost of sample Indian listed firms. From sample of 270 NSE listed Indian firms for period of nine years ranging from 2007–08 to 2015–16, using OLS multiple regression model. The empirical support to the understanding that corporate governance reduce firms cost of finance is consistent in Indian weak legal corporate setting also. However, Board characteristics has been found ineffective in causing overall cost of capital and debt and equity as well. Moreover, board characteristics have also failed to significantly affect the cost of debt. Governance effectiveness in reducing cost of capital through board structure, activities and disclosures are supporting the argument that potential investors in equity and debtholders favor monitoring mechanisms that are likely to limit managerial opportunism and consider board monitoring effectiveness as a source of greater assurance and confidence boosting mechanism among suppliers of finance and other stakeholders as well.

Keywords


Cost of Capital, Disclosures, Board Activities, Structure and Characteristics.

References