Financial Constraints and Cost of Equity: Empirical Study of Shariah Compliant Firms in Indonesia

Diana Hashim Syarif, Sugeng Wahyudi and Irene Rini Demi Pangestuti

Research in World Economy, 2019, vol. 10, issue 3, 371-381

Abstract: This study is to investigate the relationship between financial characteristics and the cost of equity capital from sharia-based companies, which tend to be financially constrained. Using 276 observations, the results of this study indicate that financial constraints which are proxied by free cash flow have a role in influencing the cost of equity capital. This study also builds an indirect relationship of free cash flow and capital costs by proposing investment efficiency as a mediator variable. By using the causal step approach from Baron and Kenny, the test results show that investment efficiency mediates the effect of free cash flow on the cost of equity capital with an indirect effect that is stronger than the direct effect. This study also found evidence that leverage has no role in strengthening the effect of free cash flow on the cost of equity capital.

Keywords: free cash flow; investment efficiency; cost of equity; leverage; shariah compliant firms (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciedu.ca/journal/index.php/rwe/article/view/16858/10464 (application/pdf)
http://www.sciedu.ca/journal/index.php/rwe/article/view/16858 (text/html)

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:jfr:rwe111:v:10:y:2019:i:3:p:371-381

DOI: 10.5430/rwe.v10n3p371

Access Statistics for this article

Research in World Economy is currently edited by Gina Perry

More articles in Research in World Economy from Research in World Economy, Sciedu Press
Bibliographic data for series maintained by Gina Perry ().