The impact of firm size and liquidity on the cost of external finance in Africa

Established illiquidity measures are constructed for emerging markets in Africa and used to determine which best explain trading costs. Costs of equity are derived from an augmented CAPM for a sample of emerging financial markets generally ignored in the literature. These include: South Africa and Namibia, three countries in North Africa and four in SSA, plus London and Paris as examples of integrated markets. Minimum variance portfolios are constructed and asset weights derived, with the sample divided into countries dependent on their legal regime. Portfolio weights are shown to be directly related to well-regulated markets with high standards of corporate governance and disclosure and firms seeking cost effective finance from SSA stock markets are at a distinct disadvantage compared with those in Northern Africa, South Africa, and in particular, London and Paris. JEL classification: G11, G12, G15, O55