Board Reforms And The Cost Of Equity:International Evidence

Using a sample consisting of 41 countries,which have undertaken corporate board reforms from 1990 to 2012,this study investigates the impact of the reforms on cost of equity using a difference-in-difference design.I measure cost of equity using Easton(2004)PEG implied cost of capital approach-an approach that uses analysts’ earnings forecast and stock prices.Based on these,I find that board reforms reduce cost of equity,and this effect pronounced more under comply-or-explain approach relative to the rule-based approach.Similarly,countries of the common law origin exhibit this effect more than do those of the civil law origin.Additionally,I analyze the major components of the reforms and find board reforms involving board independence,audit committee and audit independence and the separation of CEO and the Chairman’s role reduce cost of equity;however,no evidence is found for the non-board aspect of the reforms.Several robustness checks including the use of alternative measures of cost of equity and the use of different samples confirm my results.