The Effect of Agency Cost on the Relationship between Corporate Governance and Cost of Equity Capital

Abstract

In this paper, the effect of agency cost on the relationship between corporate governance and cost of equity capital is studied. The models for testing hypotheses are multivariate regression model from Chen et al (2011) study. For this purpose, the related data of the listed companies in Tehran Stock Exchange was utilized from the periods 2009 to 2015, including 140 companies. The results show an inverse relationship between corporate governance and cost of equity capital. This means the companies that have better governance system, will have lower financing costs and the investors demand lower yields from them. Indeed if agency cost becomes lower, real investor has more confidence, thus more financial capital is provided for companies. Also the amount of agency costs and the investment opportunities have effect on the relationship between corporate governance and cost of equity capital.

Keywords

• corporate governance
• cost of equity capital
• agency cost