Reviewing the critical literature on the relationship between corporate governance and the cost of capital from a value creation perspective

Abstract

Corporate governance encompasses a range of endeavors aimed at mitigating agency risk. The strategies encompassed in this framework are implementing stricter controls on managers' opportunistic conduct, enhancing the integrity of information dissemination inside organizations, and intensifying oversight of management activities. Numerous academic studies elucidate the potential of corporate governance policies to enhance the value of a firm. Accounting performance indicators or market metrics are commonly employed to assess the worth of a company. Conversely, as a company's cost of capital decreases, it results in the generation of value. Theoretically, organizations that possess effective safeguards for stakeholder rights and implement rigorous monitoring procedures should be capable of mitigating instances of managerial power abuse and ensuring proper resource allocation. This particular type of firm is expected to have a lower level of risk compared to other industries, hence granting it access to more cost-effective sources of finance. The primary objective of this study is to conduct a comprehensive evaluation of the existing body of literature about the impact of corporate governance on the cost of capital. The analysis will specifically focus on the value generation component of corporate governance.