Impact with regard to the sector was also highlighted in the study. Liquidity and extent to which firm is leveraged played an important role for companies operating in the construction and trading sector. Business is mostly done on cash in trading sector which is why investor’s takes interests in the working capital management of the company. EPS proved to be the decisive factor for companies doing business in the industrial product sector. In the construction sector, total asset turnover and debt to equity is pivotal in making up investor’s mind. Company is expected to have greater fixed assets in real estate and construction sector therefore Turnover company has been able to generate by virtue of its total asset ( Total asset turnover) is crucial in those sectors (Shafaai & Masih, 2013 ). Financial institutions have also been focus in investigating the factors that affects overall cost of capital. Banks generally are rescued by the respective governments when they go out of cash or facing liquidity crunch.
Help also comes from parent company so it’s really difficult to gauge the exact status of a bank. The general outcome of the study was that leverage and external support plays a crucial role in determining cost of capital. If any bank is repeatedly resorting to the help of outsiders, it doesn’t give good impression about its performance and affects negatively the cost of capital. While sometime it tells the different story too. External monetary support results into higher return on stocks as injection of money in the established bank only raises its ability to undertake riskier activities.
Thus investor in anticipation asks for higher return to compensate the risk attached in operating unforeseen market. Surprisingly the relative size of the bank seemed to be of less important for investors when it comes to bank according to the study. This aspect is seen as pivotal as far as other sectors are concerned. Well established firms have more money which entices especially equity investors but in the banking sector, this seems to be playing out quite contrary to the common belief according to this study. The logic presented by the writer is that may be large bank operates in most of the regions around the world means greater diversification which makes them more vulnerable to be affected financially.
Gearing level played a vital role in the first few years of the study during the period from 2001 till 2003 but became less important after 2008. This could mainly be due to the fact that world entered into the recession and almost all the banks were out of cash and needed money to keep them alive in the market which obviously would have translated into higher debt figure. So it was not logical to incorporate this factor while making investment decisions.
After profitability ratios, investor seems to be concerned about the extent of external support being asked by the banks. This support comes from central banks being the regulator of the banks and is taken out of funds designated for this purpose or from tax collections. It conveys to investors the deposit base of any particular bank which is decisive in making up investor’s mind (Christos, 2013). CONCLUSION In this paper, we have tried to accumulate findings for the effect of financial performance measured by ratios and other means on cost of capital. We have not tried to make a comparison between various studies rather just stated the results as being stated so as to get the clear picture. In almost all the papers viewed, it was concluded that investors do take into account financial health of the company before investing in the company. Type of financial information generally viewed by the investors depends on the sector in which company operates. Corporate governance also came out as pivotal aspect for investors as they actively look into social activities being carried out by the company.
The more company is involved in campaigns creating awareness for preserving the nature, the more popular it would be and more attraction it would get from the prospective investors. In almost all of the studies, business risk, liquidity, profitability ratios and leverage played a key role in determining cost of capital. As for the banking sector, the policies adopted by the central bank to regulate commercial banks also emerged as conclusive factor. Banks despite being profitable weren’t able to attract huge investments if they are rescued more than what is common norm though external economic situations should also be considered. Demand, choices and thought process of capital provider changes from region to region and should be well understood by finance professionals to manage the cost of capital.
Companies all around the world are greatly acknowledging the need to keep the cost of capital under control. It was observed that companies were generally cautious in adding more debt instead of equity despite having low leverage. Equity investor favors such policies. As amount of debt increases, they demand more return due to riskiness attached to being indebted.
More focused business which operates under only one sector like trading are able to attract investment easily as compared to business which is diversified. The positioning of the business in the market also plays a part in making up investor mind as companies having positive image in the market are able to get the investment easily at lesser rate. Global standing is also another factor taking into account by investors if the company operates in more than one market. As far as equity market is concerned, prevailing risk premium and risk free rate eventual decides the rate equity investors would demand.