Critical review of literature on corporate governance and the cost of capital: The value creation perspective

Abstract

Corporate governance encompasses a broad spectrum of mechanisms intended to mitigate agency risk byincreasing the monitoring of managements’ actions, limiting managers’ opportunistic behaviour, andimproving the quality of firms’ information flows. A torrent of literature explains that corporate governancemechanisms are able to enhance a firm’s value. A firm’s value is commonly measured using either market oraccounting performance measures. Alternatively, a value is created when a firm enjoys a reduction in its costof 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 offirm should have lower risk and access to cheaper sources of capital than other firms. This paper aimed toprovide a critical review of literature on the effect of corpora

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