Finance Committee and Cost of Capital

Abstract

We investigate whether finance committee is one of effective corporate governance mechanisms which are intended to reduce the agency cost between managers and shareholders, which leads to lower cost of capital. By using cost of capital proxies and hand-collected finance committee attributes, we find that the presence of finance committee have a negative effect on cost of equity capital, but not cost of debt financing. With respect to various finance committee attributes, having CFO on the committee is negatively related to cost of equity and the number of financial experts have a positive effect on it. In addition, the larger amount of equity ownership held by finance committee directors leads to lower cost of debt financing. Lastly, we provide empirical evidence on positive relations between the meeting frequency and the number of other directorships of finance committee members and cost of debt.