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The Relationship between Governance Quality and the Cost of Equity Capital in Italian Listed Firms: An Update

Author

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  • Francesca Bertoncelli

    (Graduate School of Economics, Bocconi University, 20136 Milan, Italy)

  • Paola Fandella

    (Department of Economics and Business Management Sciences, Università Cattolica del Sacro Cuore, 20123 Milan, Italy)

  • Emiliano Sironi

    (Department of Statistical Sciences, Università Cattolica del Sacro Cuore, 20123 Milan, Italy)

Abstract

This paper investigates the relationship between corporate governance quality and the cost of equity capital, intended as the discount rate the market applies to a firm’s expected future cash flows to evaluate the current share price. Using data from the Italian listed corporations in 2018, this paper combines several attributes like board independence, board size, the existence of the internal audit, and CEO duality incorporated in a corporate governance quality index. Our results do not provide evidence of a statistically significant relationship between the corporate governance score and the firm’s equity capital cost. A possible explanation is that in recent years a greater homogeneity, and a generalized increase in corporate governance quality standards, has been observed in the Italian framework with worse companies that closed the gap with those with higher performances. Hence, lower variability in the corporate governance index results in a not significant effect of a composite index on reducing the cost of equity capital.

Suggested Citation

  • Francesca Bertoncelli & Paola Fandella & Emiliano Sironi, 2021. "The Relationship between Governance Quality and the Cost of Equity Capital in Italian Listed Firms: An Update," JRFM, MDPI, vol. 14(3), pages 1-16, March.
    • Handle: RePEc:gam:jjrfmx:v:14:y:2021:i:3:p:131-:d:521031
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    References listed on IDEAS

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