Product market competition, corporate governance, and cost of capital

Abstract

We investigate how market competition and corporate governance affect a firm’s cost of equity and debt. We find firms with better corporate governance have a lower cost of equity and cost of debt. However, we find that the negative relation between cost of capital and governance primarily holds for firms in highly competitive industries. The relation between governance and cost of capital does not hold if the industry competition is weak.

Keywords:

• corporate governance
• cost of equity
• cost of debt
• product market competition

JEL Classification:

• G30
• G32