The effect of corporate governance on cost of capital : An empirical investigation of listed companies on the stock exchange of Thailand / Ailadda Ongklang

Abstract

This study investigated the effects of corporate governance on the cost of capital in the following areas: a) cost of debt, b) cost of equity, and c) weighted average cost of capital. The value of corporate governance was measured by considering the rights of shareholders, equitable treatment of shareholders, role of stakeholders, disclosures and transparency, and responsibilities of the board. On the other hand, cost of capital was determined by cost of debt, cost of equity and weighted average cost of capital.

The secondary data was obtained from 303 listed companies on the Stock Exchange of Thailand in the year 2014. The samples were companies from all industrial groups excluding the companies in financial and securities businesses, banking and insurance businesses, and companies under rehabilitation. The data were analyzed by Multiple Linear Regression at the statistical significant level of 0.05.

The results revealed that a) the rights of shareholders and disclosures and transparency had a significant negative effect on cost of debt, 2) the rights of shareholders, disclosures and transparency, and responsibilities of the board had a negative effect on cost of equity, and 3) the rights of shareholders, equitable treatment of shareholders, disclosures and transparency, and responsibilities of the board had a negative effect on weighted average cost of capital. In addition, the effect of corporate governance with five sections and the cost of capital with three methods indicated that corporate governance had a strong effect on weight average cost of capital, cost of equity and cost of debt respectively. The results also showed that the firms with higher corporate governance had lower cost of capital. The firm’s cost of capital, moreover, influenced the availability of further funding and its possibilities for investment projects. Therefore, the implementation of corporate governance principles should be the main concern.