The relationship between corporate governance and the cost of equity capital. Evidence from the Italian stock exchange

The aim of this paper is to investigate the relationship between corporategovernance (CG), in terms of its internal significance, and the cost of equity capital(CEC), based on a sample of companies listed on the Italian Stock exchange on31/12/2009. We used Italy as a case study mainly because we expect that the keyfeatures of the Italian setting in terms of financial markets and corporate governancewill impact on the relationship between CG and CEC. On the basis of a literaturereview, we identify the attributes of internal CG predicted as having a direct effecton CEC. The selected CG attributes (board independence, board size, existence ofthe audit and the nomination/remuneration committees and independence of boardcommittees) have been used to construct a comprehensive corporate governancequality index for each firm. The CG score, as indicator of CG quality, is theindependent variable of the multiple regression equation that brings together CGscore and CEC (dependent variable), after controlling for the variables related to therisk. This paper belongs to the current of research regarding the relationshipbetween CG and CEC, and it contributes to the literature dealing with CG and firmvalue determinants, by providing additional information concerning the impact ofCG on another important determinant of firm value, i.e. CEC, in a context, that ofItaly, which has not been extensively explored in previous research. The maincontribution of the paper hinges on the setting chosen, in terms of how CG and keyfinancial markets features impact on the relationship between CG and CEC offeringnew insights not previously addressed by literature. The results provide evidence ofa significant association between the CG score and the firm’s equity capitalcost,R. Mazzotta (&) S. VeltriDepartment of Business Administration, University of Calabria, Ponte Pietro Bucci,87036 Arcavacata di Rende, Cosenza, Italye-mail: romilda.mazzotta@unical.itS. Veltrie-mail: stefania.veltri@unical.it123J Manag GovDOI 10.1007/s10997-012-9230-9Author's personal copyafter controlling for differences in the Fama and French (J Financial Econ 33:3-56,1993) risk factors