Abstract
This research investigates the determinants of cost of equity using a data set of
263 firms listed on Pakistan stock exchange. Keeping in view the signaling effect
of information on the performance of capital markets in Pakistan, we used
Capital Asset Pricing Model (CAPM) to calculate the cost of equity. Correlation
and regression analysis were run to test the main effect of net earnings,
retention of fund, time interest earned, gearing, fixed asset backing, long term
debt, tax, market capitalization on cost of equity. The results’ robustness is
evidenced that market capitalization has significant impact on cost of equity. We
also show that net earnings growth, retention of funds, times interest earned,
gearing, fixed asset backing, long term debt and tax have no impact on cost of
equity. Finally, we find a sector-specific range of cost of equity that falls
between 11.54 to 16.78 percent. This indicates that financial markets in
Pakistan are more volatile with respect to any information in line with the
signaling theory.
Muhammad Akhtar, Dr. Ahmad Raza Bilal, Dr. Muhammad Naveed. (2016) The Determinants of the Cost of Equity: Evidence from Pakistan, Abasyn Journal of Social Sciences, Volume-09, Issue-2.
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