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

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.

ESG performance, investors’ heterogeneous beliefs, and cost of equity capital in China

“…With enterprises in China paying attention to ESG practice, can enterprise ESG performance reduce investors' risk expectations? Theoretically, ESG performance can reduce financing constraints (El Ghoul et al, 2011;Zhang et al, 2022), while financing constraints affect the cost of equity capital (Hashim Syarif et al, 2019), however, there is limited evidence in prior literature to support the moderating influence of ESG performance and cost of equity capital. Further, when the enterprise is seeking financing from the outside, external investors often have different understanding and interpretation of the same information, and form inconsistent expectations for the target enterprise (Hong and Stein, 2007), the investment concept is a value that reflects the investor's investment personality, urges the investor to carry out normal analysis and judgment, makes decisions and guides the investor's behavior, and reflects the investor's investment purpose and willingness.…”