Measuring the cost of equity in African financial markets

Researchers are divided over whether financial liberalisation, and the associated increase in global financial market integration, leads to economic growth. Increased global integration should lead to a lower cost of equity, thus reducing the hurdle rate for the acceptance of capital projects within firms and ultimately manifesting in increased growth. This paper adds to the empirical evidence by measuring the cost of equity in a sample of African equity markets on a sector-by-sector basis. It is found that the cost of equity across most sectors and across all markets, with the exception of Morocco, declined during the 1990s. Sectors with the largest market capitalisation in each market are shown to enjoy the lowest costs of equity and have experienced the largest declines in cost of equity over time. The results suggest that analysis using sector level data reveals important attributes in emerging financial markets that may determine whether those economies benefit from financial liberalisation.