A Survey of External and Internal Factors Influencing the Cost of Equity
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The cost of equity is an essential element of a business' financial decision-making process, which is influenced by a number of internal and external factors. This study intends to answer the question on how Czech CFOs perceive the impact of overall-economic and firm-specific factors on the cost of equity. The survey was carried out in 2015 and our sample covers 40 respondents. The findings show that there is a gap between the theory and practice and that the country’s specifics, in particular the low level of the financial market development, play a significant role in the perception of cost of equity capital determinants. First, the most commonly used cost of equity estimation approach is based on average historical returns. A considerably large number of the CFOs think that the ownership structure, dividend policy, ability to forecast financial results, stability of company´s earnings and flexibility in capital raising are the internal factors with the most significant impact on the cost of equity. Otherwise, a rather low number of respondents consider the information asymmetry, corporate governance and financial performance as having a strong influence on the cost of equity. In regard to the external factors, a substantial majority of the respondents acknowledges that the long- and short-term interest rates as well as inflation, sovereign debt and risks linked to the banking system and financial market strongly affect the cost of equity.
KeywordsCost of Equity; Capital, External Factors; Internal Factors, Economic Policy, Financial Stability, Disclosure, Corporate Governance, Social Factors, Survey, Czech Republic
Document typePeer reviewed
Document versionFinal PDF
SourceEngineering Economics. 2019, vol. 30, issue 2, p. 173-186.
- Ústav ekonomiky