The relationship between financial development and cost of equity capital in African emerging and frontier markets

Abstract

Although many studies have been done to determine the relationship between financial development and cost of equity capital in various markets, few have focused on the African emerging and frontier markets. This research therefore investigates the relationship between financial development and cost of equity capital in the African Emerging and Frontier Markets. Stock market development and banking sector development are both used as proxies for financial development in this study whilst cost of equity is determined using CAPM. The study is based on five emerging and frontier markets (Egypt, Kenya, Morocco, Nigeria and South Africa). The research finds that both measures of stock market development (stock market capitalisation to GDP ratio and stock market liquidity/turnover to GDP ratio) tend to reduce cost of equity in the African emerging and frontier markets. In a similar fashion, the banking sector development was also found to be negatively related to cost of equity