The Effect of Corporate Governance on the Cost of Capital of the Companies Listed on Palestine ExchangeFinancial resources are scarce; hence they should be selected and allocated optimally. Companies should compare the cost of financing resources and the return on investments to obtain efficiency. Corporate governance may influence the risks experienced by the companies and thus the risk premium required by financing providers, thereby influencing the cost of capital. This study seeks to examine the effect of corporate governance practices of Palestinian companies on the cost of capital. Data were collected manually from annual reports. Governance was measured by a set of selected indicators according to the extant literature and the requirements of the Code of Corporate Governance in Palestine. These indicators include board independence, the board size, gender diversity, an audit committee, CEO duality, board ownership, and ownership concentration, whereas the dependent variable was measured by the weighted average cost of capital. Finally, a multiple linear regression panel was used for the estimation and validation of the hypothesis. The study includes 44 companies listed on the Palestine Exchange, that represent all its sectors. The financial statements of those companies were used to obtain data covering the period from 2015 to 2019. The stock prices and indices were obtained from the Palestine Exchange. The interest rates were obtained from the Palestinian Monetary Authority. The total number of observations was 220. The results of a multiple linear regression panel indicate, on the one hand, that companies with high ownership concentration, board ownership, gender diversity, and CEO duality have lower costs of capital. On the other hand, the board's independence, the board size, and the audit committee were insignificant factors affecting the cost of capital. These results are consistent with the stewardship theory and resource dependence theory. The adoption of governance patterns relevant to the identification and allocation of financial resources may minimize the cost of capital. Although there are so many studies that dealt with governance, a piece of evidence on the relationship between governance and the cost of capital can hardly be found and is limited to developed countries. Taking into account the different interpretations and practices of governance across countries, the generalizability of the results of these studies is questionable. This study provides new evidence from the Palestine Exchange on the relationship between governance practices and the cost of capital. The results of this study are related to the small and unique economy of Palestine and may be generalized only to similar economies. The results would guide management in the reduction of the cost of capital for Palestinian companies by shedding light on the governance factors that have affected this cost. Identification of these factors would have a positive impact on the harsh economic conditions of the business environment that Palestine suffers from because of the strict restrictions imposed by the occupation. Accordingly, the study calls upon companies and regulators to strengthen governance practices, particularly the increase of the presence of females on boards of directors and the stimulation of audit committees.

Title

المجلة العربية للعلوم الإدارية

Publisher

An-Najah National University

Publisher Country

Kuwait

Publication Type

Both (Printed and Online)

Volume

28

Year

2022

Pages

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