Do Corporate Governance Disclosures Matter for Bank Cost of Capital? Empirical Evidence from Accounting Statements of Egyptian Banks

Abstract

The purpose of this study is to examine the association between the quality of bank governance mechanisms disclosed in bank annual reports and cost of capital. The Egyptian banking sector has undergone a series of legislative reforms starting with the issuance of the 2003 banking law. The law incorporates the guidelines of the Basel Accords and governance principles, and was declared a major step forward into facing global banking competition and driving financial growth in Egypt. We create two multivariate cross-sectional, time-series regression models to test this relation. Our main results show that there is a highly significant relation between bank governance disclosures and cost of capital. Banks with reported large board size and more executive directors on board are able to obtain finance from cheaper resources. This indicates that cost of equity of Egyptian banks is not just related to accounting performance and risk but also related to how well a bank is governed. Furthermore, the cost of deposits decreases significantly for banks reporting better governance mechanisms.