Financial Performance as a Determinant of The Cost of Capital: An Empirical Study on Listed Companies in India

Naseem Ahamed () and Nitya Nand Tripathi
Additional contact information
Naseem Ahamed: Faculty of Finance and Accounting, ICFAI Business School, Hyderabad, ICFAI Foundation for Higher Education University, India.
Nitya Nand Tripathi: Faculty of Finance and Accounting, ICFAI Business School, Hyderabad, ICFAI Foundation for Higher Education University, India.

Capital Markets Review, 2023, vol. 31, issue 2, 69-87

Abstract: Research Question: The purpose of this study is to examine the relationship between financial performance and the cost of capital of firms. Motivation: Access to inexpensive capital is a great enabler for firms especially during periods of uncertainty. The cost of capital reflects the investor’s attitude towards risk. The McKinsey Quarterly (in the December 2008) edition, found that the long-term price of risk has increased over time. This motivated us to examine the impact of firms performance on its cost of capital. Idea: The premise forming the bedrock of this study is that access to inexpensive capital would help a firm undertake multiple projects that would otherwise have not been financially feasible. Data: This study takes all non-financial companies listed on the National Stock Exchange (NSE hereafter) of India from 2004 to 2020 from the Prowess database containing more than 12,369 firm-year data points. Method/Tools: Multivariate panel regression model is used for analysis using firm and year fixed effects. We used financial data, board profile and dummies for sector and affiliation of firms. Findings: We found an inverse relationship between asset and cost of capital. This implies the corporate landscape of India is dominated by business groups and they are better placed to raise inexpensive capital than their standalone counterparts. Firms with a high dividend pay-out ratio also enjoy a lower cost of capital. Better corporate governance mechanisms such as board independence help lower the cost of capital. The results are particularly important for policymakers of emerging economies like India. Making policy decisions that would encourage wider retail investors’ participation in markets would go a long way in expanding the available capital pool for commercial enterprises. Contributions: One of the primary contributions of this study is the examination of the relationship between firm performance and cost of capital in the context of an emerging economy that is characterized by the predominance of business groups, concentrated ownership and institutional voids.

Keywords: Cost of capital; firm performance; emerging economy. (search for similar items in EconPapers)
JEL-codes: G32 L25 O16 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mfa.com.my/wp-content/uploads/2023/09/v31_i2_a4_pg69-87.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mfa:journl:v:31:y:2023:i:2:p:69-87

Access Statistics for this article

Capital Markets Review is currently edited by Hooy Chee Wooi

More articles in Capital Markets Review from Malaysian Finance Association
Bibliographic data for series maintained by Capital Market Review ().