Corporate governance, capital cost and return on investment in Brazil

Abstract

One of the hypotheses regarding benefits of good corporate governance states that it reduces the cost of capital thereby enhancing the return on investment. A comparison was made of companies to examine the correlation of better corporate governance with a lower cost of capital and improved return on investment. The methodology of Fama and French (1999) was used for companies negotiated in the New Market and as well as in governance Levels I and II of Bovespa to assign a ranking according to their practices. Examining three month periods between December 2002 and December of 2005, analysis showed a lower capital cost and return on investment for best practices of corporate governance. Proportionally, capital cost for companies with practices is 34% less and return on investment of companies with inferior practices of corporate governance is only 23% better than that of the companies with best practices of corporate governance.