The relationship between corporate governance practices and cost of capital in large listed companies of New Zealand and Singapore

Abstract

This thesis investigates the effect of corporate governance practices on cost of capital in listed companies. In particular, this study examines: 1) the relationship between corporate governance practices and cost of capital in large listed companies in New Zealand and Singapore. 2) The effects of corporate governance on cost of capital in an open economy like Singapore which is well-known as the financial hub of its region and a more isolated commodity export economy such as New Zealand. 3) The pattern between each corporate governance variable and cost of capital. 4) The best method of calculating cost of capital in New Zealand and Singapore market. Attempts at developing corporate governance in New Zealand go back to 1970s. The first set of rules and regulations regarding corporate governance practices were implemented in 1988 under the Securities Act of 1988 in New Zealand. Primary attempts in Singapore took place in 1980s by Security Industry Act of 1986. Continues efforts led to enactment of Companies Act of 1990 which was one of the effective acts regarding corporate governance. The main purpose of these mandatory corporate governance rules are promoting transparency, accountability and overall efficiency in corporate governance practices. This thesis makes a number of contributions to corporate governance practices and cost of capital in several ways. First, the relationship between corporate governance practices and financial performance is investigated in prior studies but the relationship between corporate governance and cost of capital is largely missing. This study contributes to the body of knowledge by filling this gap. Second, the majority of corporate governance studies focus on large mature economies such as US and UK and other European markets. Smaller markets such as NZ with significant agriculture based industries may differ. Analyses based on NZ and Singapore play an important role in adding to the generalizability of the understanding of corporate governance relationships. Third, the impact of the global financial crisis may differ between industrial markets and protein supply based economies. This difference and corporate regulatory changes as response to the financial crisis again inform a broader understanding of the corporate governance sophistication and foci. Fourth, an open economy like Singapore which is well-known as the financial hub of its region has different experiences in corporate governance and cost of capital rather than a more isolated commodity export economy such as New Zealand. Fifth, one major concern of academics and practitioners alike is finding the best method of calculating cost of capital. Developing a more about method of calculating cost of capital in New Zealand and Singapore is the major contribution this study makes to the finance literature. Data needed to test various hypotheses are sourced from the NZX company research (NZX Deep Archive), Singapore Exchange Market website (SGX), and Datastream and Thomson one banker databases. Required data collected from large listed companies in New Zealand (NZX50) and Singapore (STI Constituent) during 2006-2010. Care is taken to clean the data reviewing missing data, outliers and distributional properties. The focus of this thesis is on the corporate governance variables that have been supported in the literature and related theories as providing an appropriate structure for the institutions in the environment in which they operate. Because of causality test, Generalized Least Square method in pooled data estimations to explore the role of corporate governance variables on cost of capital. Careful diagnostic testing is under taken related to multicollinearity, endogeneity and heteroskedasticity employed in this study to check hypotheses relevant in this study. The findings indicate that there is negative relationship between corporate governance and cost of capital and this means that complying corporate governance guidelines help companies to control their cost of capital. However, the process by which corporate governance affects cost of capital is different in New Zealand and Singapore. Different characteristics of corporate governance in these countries led to different recommendations made by this thesis. Larger companies need higher levels of control and that is the reason of having larger boards in Singaporean companies. Findings of this thesis indicate that large boards in New Zealand and smaller boards in Singapore could help companies to control their cost of capital. Recommendations of this thesis indicate that less outside directors required in Singapore while the level of outside directors in New Zealand seems effective. Findings of this thesis about ownership structure indicate that the present level of insider ownership in both countries needs modification. Higher levels of insider ownership in both countries could help companies to control their cost of capital. Recommendation of this thesis about block ownership was slightly different in two countries. While higher levels of block ownership in Singapore recommended, the present situation of block owners in New Zealand seems to be ineffective. The findings of this thesis recommend that the level of block ownership in New Zealand should whether increase or decrease in order to help companies control their cost of capital. Various recommendations made by this thesis indicate that it is important to further develop the corporate governance code incorporating country specific characteristics.

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