IS THERE (A METHODOLOGY TO MEASURE) A CORPORATE GOVERNANCE RISK PREMIUM INTO THE CORPORATE COST OF CAPITAL?

The paper proposes to intend the firm as a nexus of stakeholder, each bearing return-to-risk expectations about the sharing of the corporate performance. All the stakeholders must achieve their own satisfaction through the bargaining of contracts that must be sustainable, i.e. keep both the firm and its stakeholders-network alive in the long term. Governance is intended as the mechanism that gives solution to the above puzzle. When market and contracts are complete, optimal solution can be easily found. But when incompleteness emerges, governance can misallocate the firm performance among the stakeholders. In fact, in incomplete contests, the stakeholders will negotiate the visible-only arguments of contracts, but this way they bind even the invisible ones, i.e. those impacting anyway on their ex-post performance. This being the case, a Governance Risk Premium (GRP) emerges in the medium-long run, incentivizing a governance repackage. Such a GRP depends both on the actual grade of market completeness and the one of contracts as per the risk allocation made through time. Even an incomplete Governance can emerge. A methodology to detect GRP is proposed accordingly.