Corporate Governance Quality and Cost of Equity in Financial Companies

Abstract

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 financial companies. It finds that financial companies with the best governance (both "internal" and "external") are associated with a higher cost of equity capital.