Corporate Governance and the Cost of Capital: Evidence from Australian Companies

Authors

  • Peter Kien Pham,

    1. PETER KIEN PHAM is an Associate Professor at the University of New South Wales. The main focus of his research is corporate finance, corporate governance, and ownership structure.
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  • Jo-Ann Suchard,

    1. JO-ANN SUCHARD is an Associate Professor at the University of New South Wales. The main focus of her research is capital raising, private equity, and corporate governance.
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  • Jason Zein

    1. JASON ZEIN is a Senior Lecturer at the University of New South Wales. The main focus of his research is corporate governance, ownership, and control around the world.
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Abstract

The authors examine a sample of large Australian companies over a 10-year period with the aim of analyzing the role that firm-level corporate governance mechanisms such as insider ownership and independent boards play in explaining a company's cost of capital. The Australian corporate system offers a unique environment for assessing the impact of corporate governance mechanisms. Australian companies have board structures and mechanisms that are similar in design to Anglo-Saxon boards while offering a striking contrast to those of German and Japanese boards. At the same time, however, the Australian market for corporate control is much less active as a corrective mechanism against management entrenchment than its U.S. and U.K. counterparts, making the role of internal governance mechanisms potentially more important in Australia than elsewhere.

The authors report that greater insider ownership, the presence of institutional blockholders, and independent boards are all associated with reductions in the perceived risk of a firm, thereby leading investors to demand lower rates of return on capital. In so doing, the study provides evidence of the important role of corporate governance in increasing corporate values.

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