A Comprehensive Examination of Corporate Governance's Impact on the Cost of Equity: Evidence from Pakistani Non-Financial Listed Firms

Abstract

Purpose: This study explores the intricate relationships between various corporate governance variables and the Capital Asset Pricing Model (CAPM) as a proxy for the cost of equity for non-financial firms listed on Pakistan Stock Exchange (PSX) during the period from 2011 to 2020. Design/Methodology/Approach: Employing a convenience sampling approach and fixed effects regression to account for unobserved heterogeneity, the research discerns both significant and non-significant associations, offering insights into the unique dynamics of the Pakistani financial landscape. Findings: Notable findings include direct and statistically significant association between BETA and CAPM, as well as the influential role of CEO duality. The Coefficient of Variation (CV), Earnings Before Interest and Taxes (EBIT), and governance-related factors like the governance index and insider ownership exhibit significant associations with CAPM. Conversely, board size, board independence, market-to-book ratio (MBR), and market debt ratio do not show statistically significant impacts on the cost of equity. Implications/Originality/Value These nuanced results contribute valuable insights for financial decision-makers and policymakers operating within the specific context of the PSX.

Keywords

• Corporate Governance
• Cost of Equity
• Capital Asset Pricing Model (CAPM)
• Pakistan Stock Exchange (PSX)