An Empirical Study on the Effects of Accounting Quality and Corporate Governance on the Cost of Equity Capital
Asian Tax Journal Vol. 10 No. 3 (2009), pp. 33-72
Abstract
This paper investigates the effects of accounting quality and corporate governance on the cost of equity capital in Korean listed firms. We set a hypothesis that good accounting quality and enhanced corporate governance reduce the cost of equity capital by mitigating information and agency risk due to separation of ownership and control in corporate organizations. The sample consists of 606 firm－year observations over 2001～2007. Firms that belong to financial industries or have non－December fiscal year－ends are excluded. Our analysis yields several important findings. First, accounting quality turns out to be a significant association with the cost of equity capital. Second, we find a negative relation between the cost of equity capital and the size of board of directors and active roles of independent directors. Third, there turns out to be a negative relation between the cost of equity capital and the level of ownership by blockholders and the level of ownership by foreigners. Fourth, it is found find that sound disclosure policy reduces the cost of equity capital. Finally, we document that the governance risk premium measured by accounting quality and corporate governance variables is positively related to the variation of individual firm's excess stock returns. In addition, the accounting quality, the ownership structure, the protection of shareholder interest, and the distribution policy are turned out to be negatively related to the systematical risk(beta). Consequently, we document that good accounting quality and sound corporate governance mitigates information and agency risk thereby reducing the cost of equity capital in Korean listed firms.
Keywords
- Cost of Equity Capital
- Accounting Quality
- Corporate Governance
- Information Asymmetry
- Agency Risk
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