Corporate Governance, Financing Patterns and the Cost of Capital: Evidence from New Zealand Companies

Abstract

In this paper, we examine the effects of corporate governance on the financing policies of New Zealand firms for the period 2004-2008. Using a comprehensive corporate governance index and its sub parts, and employing the Fama and French (1999) methodology of financing model of firms, we find that firms with weak corporate governance have more debt in their capital structure and higher cost of capital compared to firms with strong governance. We further observe that firms with different levels of corporate governance quality use different corporate governance mechanisms in relation to their financing policies, more specifically different leverage levels are used in conjunction with governance aspects such as compensation policy and shareholder rights.