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Corporate governance quality and the cost of capital

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  • Yves Bozec
  • Richard Bozec

Abstract

The objective of this study is to further investigate what channel causes firms with weak (strong) corporate governance to be valued less (more) by investors. Specifically, we examine the relationship between corporate governance scores and firms' cost of capital, including both equity capital and debt. This research is conducted in Canada over a four-year period from 2002 to 2005 and uses panel data of 155 S&P/TSX firms. The quality of firm-level governance is measured based on the ROB index published by The Globe and Mail. Using fixed-effect regressions in a 2SLS framework, we find strong evidence that the cost of equity/debt decreases as the quality of corporate governance practices increases. Canadian firms with higher ROB scores have a lower cost of capital.

Suggested Citation

  • Yves Bozec & Richard Bozec, 2011. "Corporate governance quality and the cost of capital," International Journal of Corporate Governance, Inderscience Enterprises Ltd, vol. 2(3/4), pages 217-236.
    • Handle: RePEc:ids:ijcgov:v:2:y:2011:i:3/4:p:217-236
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    Citations

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    Cited by:

    1. Naseem Ahamed & Nitya Nand Tripathi, 2023. "Financial Performance as a Determinant of The Cost of Capital: An Empirical Study on Listed Companies in India," Capital Markets Review, Malaysian Finance Association, vol. 31(2), pages 69-87.
    2. Peixin Li & Rongxi Zhou & Yahui Xiong, 2020. "Can ESG Performance Affect Bond Default Rate? Evidence from China," Sustainability, MDPI, vol. 12(7), pages 1-12, April.
    3. Luu Thi-Minh-Ngoc & Nguyen Phuong Mai, 2024. "An Application of the Scorecard Tool to Measure Corporate Governance Quality: Empirical Study in a transition country," Foundations of Management, Sciendo, vol. 16(1), pages 127-138.
    4. Muhammad Yar Khan & Anam Javeed & Ly Kim Cuong & Ha Pham, 2020. "Corporate Governance and Cost of Capital: Evidence from Emerging Market," Risks, MDPI, vol. 8(4), pages 1-29, October.
    5. Rahul Govind Pramani & Sandeep Goel & Rupamanjari Sinha Ray & A. Sarath Babu, 2023. "Corporate governance practices in the mining industry of India: an application of CG index," Mineral Economics, Springer;Raw Materials Group (RMG);Luleå University of Technology, vol. 36(3), pages 481-498, September.
    6. Ge Ge & Xiang Xiao & Zhenzhu Li & Qinghui Dai, 2022. "Does ESG Performance Promote High-Quality Development of Enterprises in China? The Mediating Role of Innovation Input," Sustainability, MDPI, vol. 14(7), pages 1-24, March.

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