The Effect of Corporate Governance on the Firm’s Cost of Capital: Evidence from the Taiwan Corporate Governance Evaluation System

This study investigates how corporate governance and changes in governance rankings influence firms’ cost of capital. Using data from 1723 Taiwanese listed firms, comprising 11,940 firm-year observations between 2017 and 2024, the analysis applies Taiwan’s corporate governance evaluation system, published by government-affiliated institutions. The results reveal a significant negative relationship between corporate governance and firms’ cost of capital, indicating that higher governance rankings are associated with lower financing costs. Moreover, when firms’ governance rankings improve, their cost of capital decreases, whereas downgrades lead to increases. These findings suggest that capital markets adjust firms’ cost of capital inversely in response to changes in governance rankings. The study further shows that the ability to reduce capital costs depends on firms’ governance levels; a downgrade results in a more pronounced cost increase for well-governed firms. Overall, this research provides empirical evidence from an emerging market and offers practical implications for firms, creditors, investors, and regulators aiming to enhance sustainable development, strengthen risk management, optimize investment selection, and improve corporate governance practices.