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The influence of financial leverage on the cost of equity at emerging markets

Student: Gareeva Yuliya

Supervisor: Yury Dranev

Faculty: Faculty of Economic Sciences

Educational Programme: Bachelor

Year of Graduation: 2014

<p>This paper is dedicated to the determination of relation between the cost of equity and financial leverage in emerging markets &ndash; South Africa and Russia. The urgency of this investigation is confirmed by the importance of companies return assessment by investors. What is more, the inclusion of the financial leverage into the model throws the light on the question connected with company&rsquo;s capital structure. The non-availability of an unified approach for the cost of equity determination in the emerging markets makes it difficult for economic agents to decide on the potential investment. Finally, ambiguous results of investigations about the connection between the cost of equity and financial leverage in the developed markets make this analysis important for consideration. The novelty of this paper is connected with the inclusion of additional factor, characterizing the premium for financial leverage in the emerging markets. What is more, the improvement of Fama and French model is undertaken. The period of observation is from 2004 to 2013 for companies operating in South Africa and from 2007 to 2013 for companies operating in Russia. The investigation was conducted with Fama and French model. The dynamic part which is shifting window of testing is included in the model. The investigation depicts the existence of positive relation between the cost of equity and financial leverage in emerging markets. This relation can be explained by additional risks related to companies with a high level of financial leverage. These risks are closely connected with the default probability of such companies that is especially important during economic downturns. What is more, companies with a high level of financial leverage are more financially constrained to finance long term profitable investment projects. That is why investors require a higher level of return on shares of these companies.</p><p>&nbsp;</p>

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