Authors : Duangnapa Sukhahuta, Ravi Lonkani, Chaiwuth Tangsomchai and Jomjai Sampet
Abstract: The aim of this syudy is to investigate the direct relationship between CEO power and the cost of equity. In addition, this study also explore the effect of Corporate Governance (CG) on the relationship between CEO power and the cost of equity, using a sample of firms listed on the Thailand Stock Exchange. This study is based on the assumption of agency theory. According to the agency theory, CEOs have a conflict of interest with shareholders. In additon, the most powerful CEOs can enjoy the most private benefits. The agency theory and the managerial power approachimply that CEO power leads to high agency cost. Therefore, this study hypothesizes that the higher cost of equity should be applicable for the higher CEO power. To test the direct effect, this study uses regression analysis. In addition, some empirical evidence supports that Corporate Governance (CG) is a set of mechanisms that can reduce the agency cost and support the firm is valuation. For example, La Porta found that in countries with better protection of minority shareholders, the companyvalue is higher. Therefore, CG should have a moderating effect on the relationship between CEO power and cost of equity. Thus, this study hypothesizes that corporate governance mechanisms moderates the relationship between the CEO power and cost of equity. To test the moderating effect, this study uses moderator regression suggested by Sharma. To the best of our knowledge, this study is the first to examine the direct relation between CEO power and cost of equity capital and to investigate the moderating effect of thedirect relationship between CEO power and cost of equity capital. This study finds that CEO power directly affects the cost of capital and firms with high CEO power experience high cost of equity. The moderator regression shows that the interaction effect between CEO power and CG is significant. In addition, CG is also significant to the cost of equity. According to Sharma CG is moderator a quasi-moderator in this model.
Duangnapa Sukhahuta, Ravi Lonkani, Chaiwuth Tangsomchai and Jomjai Sampet, 2016. Effect of Corporate Governance on Relationship Between CEO Power and Cost of Equity. The Social Sciences, 11: 4272-4284.