Abstract

This study investigates the impact of corporate governance on the cost of equity of Malaysian public listed firms over the period of 2003 to 2007. Corporate governance quality is assessed using a comprehensive corporate governance index consisting six categories. Using panel data regression technique, this study finds that corporate governance has a reducing effect on cost of equity. Firms having higher corporate governance quality in terms of credible board monitoring and financial reporting process and internal control system as well as empowering shareholders seem to enjoy a lower cost of equity. These findings suggest that those firms in emerging markets that have higher quality corporate governance suffer from fewer agency conflicts and information risk, and they also obtain significant economic benefits.

Key words: Corporate governance index, cost of equity, emerging market, board of directors, accountability and audit, shareholder rights, agency theory, Malaysia.