Corporate governance and the cost of equity: Evidence from the developing country

Download This Article

This work is licensed under a Creative Commons Attribution 4.0 International License.

Abstract

This study examines the impact of corporate governance mechanisms on a firm’s cost of equity. The corporate governance mechanisms examined consist of board size, board independence, CEO duality, multiple directorships held by board members, and board political influence. To accomplish the study objective, 210 firm-year observations for manufacturing companies listed on Amman Stock Exchange (ASE) in the period 2014–2018 are analyzed using panel data analysis techniques. The results of the fixed effects regression model reveal that CEO duality and board political influence negatively affect the cost of equity, while there is no significant effect of board size, board independence, and multiple directorships on the cost of equity. The results suggest that firms’ board of directors is an important factor in mitigating the agency problem suggested by Jensen and Meckling (1976). They also suggest that information risk is priced, which is consistent with previous research such as Easley, Hvidkjaer, and O’Hara (2002), and that the board of directors plays a role in reducing that risk in capital markets.

Keywords: Corporate Governance, Board of Directors, Cost of Equity, Jordan

Authors’ individual contribution: Conceptualization — M.A.O. and K.A.A.D.; Methodology — M.A.O., K.A.A.D., and Z.M.Z.; Validation — M.A.O., K.A.A.D., and Z.M.Z.; Formal Analysis — M.A.O., K.A.A.D., and Z.M.Z.; Data Curation — M.A.O., K.A.A.D., and Z.M.Z.; Writing — Original Draft — M.A.O., K.A.A.D., and Z.M.Z.; Writing —Review & Editing — M.A.O., K.A.A.D., and Z.M.Z.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: E22, M41, M48

Received: 09.06.2021
Accepted: 16.09.2021
Published online: 20.09.2021

How to cite this paper: Odat, M. A., Al Daoud, K. A., & Zurigat, Z. M. (2021). Corporate governance and the cost of equity: Evidence from the developing country. Journal of Governance & Regulation, 10(4), 144–155. https://doi.org/10.22495/jgrv10i4art13