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Economic Policy Uncertainty, Managerial Ability, and Cost of Equity Capital: Evidence from a Developing Country

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  • Arafat Hamdy

    (Accounting Department, Majmaah University, Majmaah 15341, Saudi Arabia
    Accounting Department, Faculty of Commerce, Beni-Suef University, Beni Suef 62521, Egypt)

  • Aref M. Eissa

    (Accounting Department, Majmaah University, Majmaah 15341, Saudi Arabia
    Accounting Department, Faculty of Commerce, Cairo University, Giza 12613, Egypt)

  • Ahmed Diab

    (Accounting Department, Prince Sultan University, Riyadh 12435, Saudi Arabia
    Accounting Department, Faculty of Commerce, Beni-Suef University, Beni Suef 62521, Egypt)

Abstract

This study investigates the relationship between economic policy uncertainty (EPU) and the cost of equity capital (CoEC). It also reveals the moderating role of managerial ability (MA) in the relationship between EPU and CoEC in Saudi Arabia. The study sample consists of listed non-financial firms in Tadawul from 2008 to 2019. We analyzed data using STATA, depending on Pearson correlation analysis, two independent sample t -tests, OLS regression, and OLS with robust standard errors clustered by firm. Our study shows a positive effect of EPU on the CoEC. In addition, the results confirm that MA mitigates the positive effect of EPU on the CoEC. This is the first research to investigate the influence of the relationship between EPU on CoEC in Saudi Arabia, one of the largest emerging economies in the Middle East and Gulf countries. Our findings motivate decision-makers to strengthen their MA and establish a safe and stable investment environment to ensure better financing and investment decisions during uncertain times. Lending agencies, investors, and other stakeholders should consider the MA of corporations when making investment decisions.

Suggested Citation

  • Arafat Hamdy & Aref M. Eissa & Ahmed Diab, 2024. "Economic Policy Uncertainty, Managerial Ability, and Cost of Equity Capital: Evidence from a Developing Country," Economies, MDPI, vol. 12(9), pages 1-16, September.
    • Handle: RePEc:gam:jecomi:v:12:y:2024:i:9:p:244-:d:1476125
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    References listed on IDEAS

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    1. Alex Petkevich & Andrew Prevost, 2018. "Managerial ability, information quality, and the design and pricing of corporate debt," Review of Quantitative Finance and Accounting, Springer, vol. 51(4), pages 1033-1069, November.
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    3. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
    4. Kimberly J. Cornaggia & Gopal V. Krishnan & Changjiang Wang, 2017. "Managerial Ability and Credit Ratings," Contemporary Accounting Research, John Wiley & Sons, vol. 34(4), pages 2094-2122, December.
    5. Xu, Zhaoxia, 2020. "Economic policy uncertainty, cost of capital, and corporate innovation," Journal of Banking & Finance, Elsevier, vol. 111(C).
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