he Influence of the Company's Size on the Cost of Equity: Evidence from Developing Markets

<p>There was an empirical research devoted to the influence of the company size on the cost of equity in the emerging &nbsp;capital markets, particularly Russian and South African. The estimation was carried out for the stock markets of Russia and South Africa, using different size measures, particularly market capitalization, book value of assets and EBITDA. The studying period was since 2007 to 2013 for Russia, due to the lack of data for the construction of the optimal number of portfolios, and since 2003 to 2013 for South Africa. There were constructed 12 portfolios using particular size measure and growth indicator. For each portfolio &nbsp;the average returns were estimated and spreads of the return between portfolios of small and large companies were calculated and the significance of these spreads was checked. Then there was performed the test of the Fama-French model using Fama-McBeth procedure and the estimation of the SMB premium for Russia and South Africa.</p><p>The assumption of the negative relationship between the cost of equity and the size of the company was not confirmed. &nbsp;In fact, negative spreads between returns between portfolios of small and large companies were estimated, the relationship between return and size was positive. SMB premium in the Fama-French model was also negative. It was also revealed, that the size premium varies when using different size measures. It was also found, that the size premium was not equal between portfolios of the companies with different growth levels, what was confirmed by the significant HML premium. In addition it should be noted that returns for the portfolios of the medium-sized companies often exceed yields on portfolios of small and large ones, what can be caused by the non-linearity of the size effect. This fact should be investigated in the future researches.</p>