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Corporate governance and cost of equity: the moderating role of ownership concentration levels

Muhammad Arsalan Hashmi (Institute of Business and Health Management, Dow University of Health Sciences, Karachi, Pakistan)
Urooj Istaqlal (Faculty of Economics and Business, Universiti Malaysia Sarawak, Kuching, Malaysia) (College of Management Sciences, Karachi Institute of Economics and Technology, Karachi, Pakistan)
Rayenda Khresna Brahmana (School of Economics, Finance and Accounting, Coventry University, Coventry, UK)

South Asian Journal of Business Studies

ISSN: 2398-628X

Article publication date: 7 February 2023

269

Abstract

Purpose

The study analyzes the influence of corporate governance and ownership concentration levels on the cost of equity. Further, the authors extend the literature by investigating the moderating effect of ownership concentration levels (i.e. at 5%, 10% and 20%) on the relationship between corporate governance and the cost of equity.

Design/methodology/approach

The study applies several robust panel regression techniques to a sample of 114 active non-financial companies listed on the Pakistan Stock Exchange from 2011 to 2016. Corporate governance was measured through a unique index comprising 30 governance attributes. The cost of equity was measured through the capital asset pricing model. Further, the authors construct three variables for ownership concentration levels, i.e. at 5%, 10% and 20%. To address the endogeneity problem, the one-lagged variable model and GMM approaches were also applied.

Findings

The results indicate that better corporate governance reduces the cost of equity, while ownership concentration at high thresholds would increase the cost of equity. Further, the authors find that ownership concentration at the 20% threshold moderates the relationship between corporate governance and the cost of equity. Thus, the authors argue that firms can minimize the risk faced by shareholders by implementing substantive corporate governance mechanisms. In addition, effective corporate governance mechanisms at high ownership concentration levels are imperative for managing the cost of equity.

Originality/value

The study reports novel evidence that ownership concentration at a high threshold moderates the effect of corporate governance on the cost of equity.

Keywords

Citation

Hashmi, M.A., Istaqlal, U. and Brahmana, R.K. (2023), "Corporate governance and cost of equity: the moderating role of ownership concentration levels", South Asian Journal of Business Studies, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/SAJBS-01-2021-0019

Publisher

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Emerald Publishing Limited

Copyright © 2023, Emerald Publishing Limited

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