The impact of corporate governance and earnings management practices on cost of equity capital: Evidence from Thai listed companies

Abstract

The significant impact of recent, and often high-profile, corporate accounting scandals, is often attributed to earnings management and factors surrounding cost of equity capital. Understanding the relationship between these factors is important for both the management of corporations and for the confidence of their investors. The main of objective of this paper is to examine the influence of earnings management and corporate governance on the cost of equity capital in listed companies in Thailand and determine their impact, which could be used to initiate strategies to restore investor confidence. Earnings management in this paper is measured from the absolute value of discretionary accruals that are calculated from five different models. Corporate governance variables in this paper include board interlocking, board independence, board size, CEO-Chair duality, audit committee financial expertise, audit opinion, managerial ownership and institutional shareholders. The CAPM and Industry Adjusted Earnings to Price ratio model are used as a proxy for the cost of equity capital in this paper. To test the influence of these factors, a fixed-effect panel data regression model is applied. The results reveal that companies with higher earnings management, higher proportion of managerial ownership, institutional ownership, CEO-Chair duality and which receive modified audit opinions are likely to have higher cost of equity capital. In contrast, the companies that have higher proportion of board independence, audit committee financial expertise and board interlocking are likely to have lower cost of equity capital.