The Cost of Capital and Firm Performance: An Empirical Evidence from Pakistan

Abstract

This paper examines the effect of cost of capital on firm’s performance for the capital market of Pakistan using latest data and new evidence. Firm's cost of capital is determined in the capital markets and is closely related to the degree of risk associated with new investments, existing assets, and the firm's capital structure. Firm's specific financing and weighted-average cost of capital (WACC) is essential for a good financial management. We use secondary data of 52 companies for the 11 years from 2010-2019. Firm performance is proxied by Return on Assets (ROA), Return on Equity (ROE), while cost of capital is proxied by Weighted Average Cost of Capital (WACC). Results show that firms in Pakistan rely on debt that generating internal sources of capital. The results of the study show that there is a significant negative association between cost of capital and firm performance. The study recommends the firms to
achieve the best debt ratio with the minimum cost to maximize the firm performance. Also, the firms should rely less on short term debt which formed major part of their leverage and focus more on developing internal strategies that can improve their financial performance