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.