Purpose: Financial 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 and consequently, the cost of capital. This study seeks to examine the effect of corporate governance practices of Palestinian companies on the cost of capital.
Study design/methodology/approach: Data was collected manually from annual reports. Governance was measured using a set of indicators adopted based on the extant literature and the requirements of the Palestinian Code of Corporate Governance. These indicators include board independence, board size, gender diversity, existence of audit committee, CEO duality, board ownership and ownership concentration. On the other hand, the dependent variable was measured by the weighted average cost of capital. Finally, a panel multiple linear regression was used for estimation and validation of hypothesis.
Sample and data: The study included 44 companies listed on the Palestine Exchange representing all its sectors. The financial statements of these companies were used to obtain data covering the period from 2015 to 2019. The stock prices and indices were obtained from the Palestine Exchange and the interest rates were obtained from Palestinian Monetary Authority. The total number of observations was 220.
Results: The regression results indicate that firms with high ownership concentration, board ownership, gender diversity, and CEO duality have lower cost of capital. On the other hand, the independence and the size of the board and also the existence of audit committee were insignificant in affecting cost of capital. These results are consistent with Stewardship Theory and Resource Dependence Theory.
Originality/value: The adoption of governance patterns relevant to identification and allocation of financial resources may minimize the cost of capital. Though many studies have considered governance, evidence on the relationship between it and the cost of capital is rare and 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 on the relationship between governance practices and the cost of capital from the Palestine Exchange.
Research limitations/implications: The results of this study are related to the small and unique economy of Palestine and may be generalized to similar economies only. The results would guide management in the reduction of the cost of capital for Palestinian companies by shedding light on the factors related to governance that affecting this cost. Identification of these factors would have a positive impact on the business environment in light of the economic conditions that Palestine suffers from as a result of the restrictions imposed by the occupation. Based on the results, the study called companies and regulators to strengthen governance practices, especially increasing the presence of females on boards of directors and stimulating audit committees in companies.