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Corporate Governance and the Cost of Capital: Evidence from Australian Firms

Journal of Applied Corporate Finance, Vol. 24, Issue 3, pp. 84-93, 2012

UNSW Australian School of Business Research Paper No. 2013 BFIN 03

31 Pages Posted: 21 Sep 2007 Last revised: 5 Jul 2013

Jo-Ann Suchard

UNSW Australia Business School, School of Banking and Finance; Financial Research Network (FIRN)

Peter K. Pham

Australian School of Business - University of New South Wales; Financial Research Network (FIRN)

Jason Zein

UNSW Business School; Financial Research Network (FIRN)

Date Written: 2012

Abstract

Using a sample of large Australian firms from 1994 to 2003, we show that variation in firm-level corporate governance mechanisms plays an important role in explaining a firm's cost of capital. Our empirical results show that greater insider ownership, the presence of institutional blockholders and independent boards all serve to reduce the perceived risk of a firm, thereby leading investors to demand lower rates of return on capital provided. This highlights the important role that corporate governance plays in creating value for shareholders by reducing the cost of external financing. Given the inconclusiveness of existing literature that uses Q to measure firm value, this research provides an alternative and potentially more suitable way to investigate the impact of corporate governance on firm value.

Keywords: Corporate governance, Firm value, Cost of capital, Australia

JEL Classification: G32

Suggested Citation

Suchard, Jo-Ann and Pham, Peter K. and Zein, Jason, Corporate Governance and the Cost of Capital: Evidence from Australian Firms (2012). Journal of Applied Corporate Finance, Vol. 24, Issue 3, pp. 84-93, 2012; UNSW Australian School of Business Research Paper No. 2013 BFIN 03. Available at SSRN: https://ssrn.com/abstract=1015986 or http://dx.doi.org/10.2139/ssrn.1015986

Jo-Ann Suchard (Contact Author)

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia
61 2 9385 5876 (Phone)
61 2 9385 6347 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Peter Kien Pham

Australian School of Business - University of New South Wales ( email )

Sydney, NSW 2052
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Jason Zein

UNSW Business School ( email )

Sydney, NSW 2052
Australia
+61 2 93855858 (Phone)
+61 2 93855858 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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