An Empirical Nexus between Corporate Governance Practices and Cost of Equity: Evidence from PSX-Listed Firms

Abstract

The current study scrutinizes the relationship between the cost of equity and corporate governance practices within companies listed on the Pakistan Stock Exchange (PSX).The Capital Asset Pricing Model (CAPM) is applied to determine the cost of equity. A Sys-GMM model was applied to a sample of 170 businesses listed on the Pakistan Stock Exchange (PSX) from 2014 to 2019 to establish a connection between the variables. Sys-GMM is effective in addressing endogeneity issues related to corporate governance variables. In addition, the Sys-GMM results were compared with pooled OLS and fixed effects. It was discovered that the subsequent approaches failed to address the endogeneity issue, consequently yielding biased results. The findings unveiled a negative nexus amid cost of equity and block ownership. The output indicated that board size plays a key role in reducing the cost of equity. Interestingly, audit quality is directly related to equity cost, however, female directors and leverage were not linked with the cost of equity. The findings will direct policymakers in expanding or adapting the scope and depth of corporate governance practices, which will certainly facilitate the production of the right corporate climate in the country.