Critical review of literature on corporate governance and the cost of capital: The value creation perspective
Document Type
Article
Publication Date
1-1-2010
Abstract
Corporate governance encompasses a broad spectrum of mechanisms intended to mitigate agency risk by increasing the monitoring of managements' actions, limiting managers' opportunistic behaviour, and improving the quality of firms' information flows. A torrent of literature explains that corporate governance mechanisms are able to enhance a firm's value. A firm's value is commonly measured using either market or accounting performance measures. Alternatively, a value is created when a firm enjoys a reduction in its cost of capital. Theoretically, firms that have robust monitoring devices including strong protection of stakeholders' rights will be able to limit the extent of managerial power abuse and prudently allocate resources. This type of firm should have lower risk and access to cheaper sources of capital than other firms. This paper aimed to provide a critical review of literature on the effect of corporate governance on the cost of capital emphasising on the value creation perspective of corporate governance.
Keywords
Corporate governance, agency theory, cost of capital, cost of equity capital, cost of debt
Publication Title
African Journal of Business Management
Volume
4
Issue
11
Publisher
Academic Journals
Publisher Location
P O BOX 5170-00200 NAIROBI, VICTORIA ISLAND, LAGOS 73023, NIGERIA