Corporate Governance and Thecost of Equity Capital of Manufacture Company on Jakarta Stock Exchange 2000-2003
Abstract
Setiawan, Melly Andreas (2006). Corporate Governance and The Cost of Equity
Capital ofManufacture Company on Jakarta Stock Exchange 2000-2003. Faculty
ofEconomics, Islamic University ofIndonesia, Yogyakarta.
Separation of ownership and control in corporate organizations creates
information asymmetry problems between shareholders and managers that expose
shareholders to agency risk. Information asymmetry creates a moral hazard
problem when managers have incentives to pursue their own interests at
shareholder expense. Imperfect information on the quality ofmanagement and the
economic value ofthe firm result in greater agency risks being imposed on the
shareholder. Thus, the corporate governance is used as a mechanism to reduce
agency costs, and therefore, firms with better corporate governance
implementation should have ahigher valuation and alower cost ofequity capital.
This empirical study has a purpose to analyze whether the corporate
governance mechanisms, consisting ofthe quality offirms' financial information,
ownership structure, and board structure has an effect on the firms' cost of equity
capital. The sample used consists of301 Indonesian firms that are listed in Jakarta
Stock Exchangefor the periodof2000-2003.
The results show that the corporate governance mechanisms have a
relation but not significantly affected to the cost ofequity capital. Moreover, the
result provides support the hypothesis that abnormal accruals positively affect
significant the cost of equity capital. This result leads to the conclusion that
although a firm has already implemented corporate governance mechanisms; it
will not affect the cost ofequity capital.
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