Abstract

The cost of capital is one of the fundamental concepts of modern finance. The theoretical value of a firm is the sum of its future cash flows discounted back to present value by this cost of capital. In classical theory, companies should only accept projects that have returns higher than their cost of capital. There has been considerable research into the determination of the cost of capital, but less into the practical side. Is there a measurable relationship between cost of capital and investment? Do firms that generate sufficient cash flow from their investments enjoy a lower cost of capital than those that do not? This paper looks at these questions from an Emerging Markets perspective, given the increase in both available information and interest in these markets, focusing on the Information Technology sector. In addition to the cost of capital, we include other variables such as corruption perceptions, cash flows and institutional ownership which can theoretically impact both the level of investment and the cost of capital. We find evidence of a significant relationship between both cash flow and corruption to the rate of investment. However, the relationship between investment and cost of capital is less clear.