Year of Graduation
Influence of Investment on Cost of Capital on Emerging Markets
Classic asset pricing models (Sharpe, 1964; Lintner, 1965; Black, 1972) relate expected rate of return on equity with return on market portfolio, making a remark on risk connected with investments in the company’s securities. Firstly, it is obvious that this method does not include essential factors that influence on securities risk. Secondly, Cochrane (1996) claims that such models describe these changes quite successfully, but fail to explain them.This fact makes it vital to analyze the influence of company's fundamentals – its real indices that may characterize its financial position and perspectives for further development. Many researchers believe that investment is one of the key determinants of the cost of equity in emerging markets.The aim of this study is to determine the influence of investment expenditures on cost of equity in Russia and South Africa.The purposes of the study are to:· Examine the theoretical asset pricing models and empirical results in developed and emerging markets;· Develop a model for further investigation of investment influence on cost of equity based on Fama and French model;· Form sample by nonfinancial companies in Russia and the Republic of South Africa;· Investigate the relationship between the size , growth and investment effects on the basis of a portfolio approach;· Construct factors that characterize the premium for size premium for growth and premium for investment;· Estimate premiums for size, growth and investment through regression analysis.In this paper we tested three-factor Fama and French model (Fama, French, 1992) in Russia and South Africa, with the addition of a fourth factor characterizing the premium for investment. Factor was built using portfolios, reflecting the size of the investment using different indicators (relative increase in total assets and the ratio of capital expenditures to total assets).Two-step Fama Macbeth procedure was used to evaluate not only the nature of the relationship factors and return on assets, but also a premium for size, growth and investment at the panel data.Premiums received on South Africa as a whole were positive and may be comparable to premium in developed countries. The results for Russia are quite controversial. Significance and premiums vary depending on the study period and this indicator.