Critical review of literature on corporate governance and the cost of capital: The value creation perspective

Abstract

Corporate governance encompasses a broad spectrum of mechanisms intended to mitigate agency risk by
increasing the monitoring of managements’ actions, limiting managers’ opportunistic behaviour, and
improving the quality of firms’ information flows. A torrent of literature explains that corporate governance
mechanisms are able to enhance a firm’s value. A firm’s value is commonly measured using either market or
accounting performance measures. Alternatively, a value is created when a firm enjoys a reduction in its cost
of capital. Theoretically, firms that have robust monitoring devices including strong protection of stakeholders’
rights will be able to limit the extent of managerial power abuse and prudently allocate resources. This type of
firm should have lower risk and access to cheaper sources of capital than other firms. This paper aimed to
provide a critical review of literature on the effect of corpora