توسعه مالی، مدیریت شرکت ها و هزینه سرمایه سهام Financial Development, Corporate Governance and Cost of Equity Capital

1. Introduction What are the major factors that affect a firm’s cost of equity capital? According to one strand of research, legal protection of minority shareholders is a significant factor.1 Hail and Leuz (2006) document that firms from countries with more extensive disclosure, stronger securities regulation, and stricter enforcement mechanisms enjoy a lower cost of capital. Another strand posits that firm-level corporate governance is a crucial factor. Chen et al. (2009) show that firm-level corporate governance quality has a significantly negative effect on the cost of equity capital in emerging countries with weak legal protection of investors. Besides the country and firm-level corporate governance factors, another key factor that affects the cost of capital is the level of financial development and access to capital (Doidge et al., 2007; Aggarwal et al, 2009; Rajan and Zingales, 1998; Love, 2003). However, none of the papers explicitly investigate the role of financial development in influencing the corporate governance – cost of equity capital relationship.2 Our study contributes to the literature by directly studying the corporate governance – cost of equity capital link by examining the level of financial development. Arguably, the external governance environment in which a firm operates is more important than the internal governance mechanisms that a firm adheres to. This is because the quality of a country’s legal institutions reflects an ongoing commitment to good governance. Often the internal governance preferences of a firm reflect self-serving choices rather than a commitment to good governance. We therefore include both features and this study is the first one to show that internal governance and country-level financial development play complementary roles in influencing a firm’s cost of equity capital. There are a few cross-country studies that have studied both country-level institutional variables and firm-level governance. Chen et al. (2009) study a cross-country sample of firms from emerging markets and show that country-level institutional variables and firmlevel corporate governance substitute for each other in affecting the cost of equity. Zhu (2014) examined a cross-country sample of developed countries and found that the association between governance practice and the cost of equity is more evident in countries characterised by strong legal protection, strict information rules, and high government quality. Therefore it appears that firm-level and country-level governance play complementary roles to each other in decreasing the cost of equity. Overall, these results support the argument in Doidge et al. (2007) that the adoption of good internal governance is prohibitively expensive in weakly protected countries. Further, even if firms successfully commit to higher standards, the benefits of doing so in terms of access to capital markets on better terms, are limited since, in general, weakly protected countries are often associated with less financial development. However, none of the extant studies explicitly examine the interactive role of financial development with firm-level corporate governance on cost of equity.