Analysing the Impact of Cost of Capital on Business Growth: Insights From Firms Listed on Frankfurt Stock Exchange

ABSTRACT Cost of capital plays a critical role in shaping business growth, influencing firms' investment decisions, financing strategies and overall market performance. The study applied the capital asset pricing model (CAPM) theory to examine the influence of the cost of capital on business growth. This research used data from 227 nonfinancial entities listed on the Frankfurt Stock Exchange between 2005 and 2022 from Thomson Reuter Eikon DataStream. The study employed three estimation methods: the Common Shock Autoregressive Distributed Lag (CS‐ARDL), Common Correlated Effects Mean Group (CCEMG) and a two‐step difference generalized method of moments (GMM) to analyse the impact of the cost of capital on revenue, assets and income growth. The weighted average cost of capital (WACC) was found to have a positive and significant effect on income and asset growth in both short‐ and long‐run periods. In contrast, a positive and significant impact on sales growth was observed in both the short‐ and long‐run periods. The moderating relationship between WACC and market size had both a short‐ and long‐run positive and significant effect on income and revenue growth. In contrast, a negative and significant impact on asset growth was observed in both the short‐ and long‐run periods. The results suggest that financing costs and market size jointly influence firm growth, underscoring the importance of efficient capital management and strategic market expansion to enhance investor confidence and valuation.