CFA Level I · CFA Level I Exam · Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits
Which of the following is the most likely benefit to a company of having effective corporate governance?
Effective corporate governance most likely lowers the company's cost of capital. Better oversight, transparency and protection of investors reduce perceived risk, so investors and lenders require lower returns. Governance cannot guarantee dividends or remove business risk, because operating and market uncertainty remain regardless of board quality.
- AGuaranteed higher dividends
- BLower cost of capitalCorrect
- CElimination of all business risk
Explanation
Effective governance reduces perceived agency and operational risk, so investors and lenders demand lower returns, which lowers the cost of capital. It cannot guarantee dividends or remove business risk, which comes from operations and markets.
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