Literature Review

Impact of Corporate
Governance and Ownership
Structure on Cost of Capital
in Pakistan
Corporate Governnace
Corporate governance has been one of the most
important areas of research over the last two decades
and after the collapse of many firms in the late 90's
there is a tremendous acceleration of research of
various issues of corporate governance.
Corporate Governnace
Despite having a noteworthy discussion by different
scholars and pioneers of research on corporate
governance, it is difficult to define due to
comprehensively broad, multifaceted notion that is
broadly relevant and having a variety of scope that it
embraces (Florackis,, 2008).
Corporate Governnace
Corporate governance refers to act in a direction which
align the interests of managers and stockholders and
to make sure that firms are operating for the long term
benefits of the suppliers of funds (Du Plessis et al.
2018).
Cost of Capital
Cost of capital refers to the financial charges borne by
the firm and the minimum expected amount of return
that an investment project must earn to raise the firm
value.
 However, it is the amount of return required by the
capital providers, which is used, to set the target levels
of company's profit in order to comply with the
requirements for survival in the business.
Cost of Capital
Particularly, it is the cost of additional dollar necessary
to finance the investment opportunity and usually
measured by the weighted average cost of capital
(WACC) (Gitman, 2003).
 Major contribution of the Present
Study
The aim of this study is to analyze the critical role of
elements of corporate governance, specifically, the
ownership structure on the cost of the financial capital
faced by the non financial firms in Pakistan.
 Figure 1:Theoretical Model

Ownership
Structure

Corporate
Governance Cost of Capital
6. Research Objectives

The objectives of the present study include:

To investigate the relationship between effective
corporate governance mechanism and cost of capital
of the firm.
To investigate the relationship between ownership
structure and cost of capital of the firms.
 
Methodology
The present study intends to analyze the impact of
corporate governance and ownership structure on the
cost of capital of the 76 non-financial firms listed on a
Pakistan Stock Exchange (PSX) for the period of 2004-
2016. The dependent variable of this study is cost of
capital which is measured by the technique of the
weighted average cost of capital(WACC).
Methodology
However, corporate governance and the ownership
structure are the explanatory variables measured by
the size and the composition of board, CEO/Chair
duality, managerial ownership, institutional
ownership and the family ownership. The study
involves panel data and the empirical analysis will be
done by using the following model of multiple
regression and by applying the technique of pooled
regression analysis.
Mathematical model
COCit = β0 + β1(BSit) + β2(B-COMit) + β3(INSTit) +
β4(MANGit) +β5(DUALITYit) +β6 (FAMILYit) + e it
Mathematical model
Where:

WACC = Weighted Average Cost of capital of the firm

BS= Board size

B-COM = Percentage of non-executive directors on the board

INST= Institutional Shareholding

MANG= Managerial Shareholding

FAMILY = Family ownership

DUALITY = CEO/Chair Duality

e = Error Term
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