An Empirical Investigation of Corporate Governance and Cost of Capital: The Case of Thai Listed Companies on the Stock Exchange of Thailand

Ailadda  Ongklang; Kusuma  Dampitakse; Panarat  Panmanee

Ailadda Ongklang Rajamanggala University of Technology Thanyaburi
Kusuma Dampitakse Rajamanggala University of Technology Thanyaburi
Panarat Panmanee University of the Thai Chamber of Commerce, Thailand

Keywords: Corporate Governance, Cost of Equity, Cost of Debt, Weighted Average Cost of Capital

Abstract

This study explored the relationship between corporate governance and the cost of capital which consisted to three main objectives including 1) to investigate the relationship between corporate governance and cost of debt, 2) to investigate the relationship between corporate governance and cost of equity and 3) to investigate the relationship between corporate governance and weighted average cost of capital. In this study, corporate governance was measured by rights of shareholders, equitable treatment of shareholders, role of stakeholders, disclosure and transparency and responsibilities of the board whereas cost of capital was determined by cost of debt, cost of equity and weighted average cost of capital.

The secondary data obtained from 303 listed companies on the Stock Exchange of Thailand in 2014 with the accounting period beginning on 1^st January and ending on 31^st December were employed in this study. The samples were companies from all industrial groups except the companies in financial and securities businesses, banking and insurance businesses, and companies under rehabilitation. The data were analyzed by means of Multiple Linear Regression at a significance level of 0.05.

The results revealed that rights of shareholders and disclosure and transparency had a significant negative effect on cost of debt. Rights of shareholders, disclosure and transparency, and responsibilities of the board also had a negative effect on cost of equity. Moreover, rights of shareholders, equitable treatment of shareholders, disclosure and transparency, and responsibilities of the board had a negative effect on weighted average cost of capital. According to the study of the effect of corporate governance with five aspects on cost of capital with three methods, it could be concluded that corporate governance strongly has an effect on weighted average cost of capital, cost of equity, and cost of debt, respectively. In addition, the results showed that the firm with higher corporate governance had a lower cost of capital. Besides, the firm’s cost of capital influences the availability of further funding and its possibilities for investment projects. Therefore, the implementation of corporate governance principles should clearly be a concern.