Corporate Governance and Cost of Equity Capital using DCAPM
COMSATS University Islamabad
The study analyzes the impact of corporate governance attributes on cost of equity capital. For the purpose of analysis, a sample of 230 non-financial firms listed on Pakistan Stock Exchange is analyzed from 2003-14. Corporate governance is measured by ten proxies such as board size, board independence, board meetings, CEO duality, concentrated ownership, institutional ownership, managerial ownership, Big-5 ownership, audit quality and audit committee composition whereas the cost of equity capital is estimated using two approaches suggested by Estrada (2002) i.e., Downside Capital Asset Pricing Model (DCAPM) and Capital Asset Pricing Model (CAPM). The individual firm and industry level analysis is conducted using panel data. The results showed that board independence, CEO duality, institutional ownership and audit quality have statistically significant impact on cost of equity capital. Further, the research suggests that DCAPM is more suitable measure of cost of equity for the Pakistani listed firms than CAPM. In addition to it, the industry analysis confirmed that the impact of corporate governance mechanism is not homogenous across different industries.
Keywords: Corporate Governance, Cost of Equity Capital, DCAPM