Internal factors influencing the cost of equity capital

Abstract

In this paper we compile and evaluate the research available on internal factors influencing the cost of equity capital. The topic has been extensively studied for the past few decades; however, the information is spread and is not accumulated. We begin by reiterating the reasons why information asymmetry drives financial decisions. Next, we review recent literature that focuses on financial disclosure and accounting information, i.e. internal factors that are directly connected with information asymmetry. In the remainder of our review we discuss a recent debate on the impact of corporate governance and social factors. Aside from theoretical contribution, the comprehensive literature review of existing studies results in formulation of a strategy how to decrease to cost of equity capital by means of internal factors adjustments. We believe that highlighting the key points in the debate will be beneficial for both academicians and practitioners who will be able to form an independent view of the approaches how to take influence on the cost of equity capital.

A Survey of External and Internal Factors Influencing the Cost of Equity: The Case of Czech Companies

“…Moore & Reichert (1983) examined a sample of 74 enterprises from different industries and based on results of financial analysis conclude that more than 80 % of them applied time-adjusted capital budgeting methods. They, however, point out that, compared to previous surveys, a high level of agreement between financial analytical methods applied by managers and theoretical approaches proposed by researchers exists (Mokhova, 2016). Bruner et al (1998) conducted a survey on cost of capital in a sample of highly regarded corporations and leading financial advisor offices in order to investigate the gap between the corporate practice and theoretical approaches.…”

“…The internal factors comprise all factors within the company which can be controlled by managers. Mokhova (2016) suggests that these factors can be divided into several categories including e.g. corporate governance, dividend policy, or financial performance.…”

“…Researchers very often suggest using accumulative corporate disclosure measurements that include factors such as accounting standards, quantity of information, information structure, type of disclosure, accounting and financing conservatism, reporting system, audit quality, etc. (Mokhova, 2016;Bistrova et al, 2011;Lopes & Alencar, 2010;Meluzin, 2008;Espinosa & Trombetta, 2007).…”

“…On the one hand, a company can manage internal factors represented by factors such as financial disclosure, depth of corporate governance, and social responsibility. On the other hand, enterprises cannot take influence on external factors in the form of interest and tax rates, inflation, or stability of the national and global financial systems in order to modify them to the company's needs (Mokhova, 2016).…”

“…Each theory is based on assumptions that might not always be in accordance with the real economy. Moreover, the CFOs might not pay attention to up-to-now research results in terms of managing the cost of capital (Mokhova, 2016). Therefore, our original survey findings are an essential contribution to understand the decision making process on equity in large and non-financial common stock companies operating in the Czech Republic.…”