Corporate Governance Mechanism to Decrease the Cost of Equity: Empirical Study on the Indonesian Infrastructure Company

Abstract

The 1997 Asian financial crisis highlighted the importance of Good Corporate Governance (GCG) practices in developing countries, including Indonesia, which to this day still faces challenges in improving the quality of corporate governance, especially in the infrastructure sector. Good GCG practices are believed to be able to reduce the cost of equity by increasing transparency and investor confidence, however their implementation in Indonesia is still not optimal even though various regulations have been made. This research aims to provide a deeper understanding of how Good Corporate Governance practices can influence the cost of company equity in this strategic sector. This research uses a quantitative approach with a population of infrastructure sector companies listed on the Indonesia Stock Exchange (BEI) during the 2019–2023 period. The sampling technique uses a purposive sampling method, namely selecting samples based on certain criteria. Data was collected through documentation methods, namely by accessing company annual reports from the official IDX website and each company's website. The data analysis technique used is panel data regression with the help of the Eviews 10 application, which involves the Chow test, Hausman test, and Lagrange multiplier test to determine the best model, as well as partial tests (t tests), simultaneous tests, and coefficient of determination tests to test the research hypothesis. The research results show that the variables that have a significant influence on the cost of equity include Block Ownership which has a positive influence, Insider Ownership, Institutional Ownership, and Foreign Ownership which each have a negative influence, as well as Independent Non-Executive Directors which have a positive influence. Meanwhile, the variables Non-Executive Directors, Board Size, Board Meeting, Gender Diversity, CEO Duality, CEO Tenure, and Political Connections do not show a significant influence on the cost of equity. This shows that the ownership structure and role of independent directors play a more important role in determining the cost of equity than board characteristics and other aspects.