The Impact of Corporate Governance Index on Capital Cost and Systematic Risk

Abstract

Appropriate corporate governance mechanisms are essential factors for efficient use of resources, improvement of accountability and transparency, and observation of fairness and the rights of all stakeholders of firms. This study investigates the relation of corporate governance index to capital cost and systematic risk. The sample consists of 235 firms listed in Tehran Stock Exchange in 2014. This study uses regression analysis method to test the hypotheses and applies 4 corporate governance criteria to measure corporate governance index primarily calculated by SEO in 2014. The results show a significant negative relation between capital cost and corporate governance index and a significant positive relation between systemic risk and corporate governance index. Therefore, effective and strong corporate governance reduces information asymmetry and ensures accurate reporting, increases transparency and stakeholders' confidence and consequently reduces cost of capital. Also, shareholder-oriented corporate governance mechanisms have more systematic risk, thus good corporate governance may lead to higher risk instead of preventing it.

Keywords

• corporate governance index
• Cost of capital
• the systemic risk