Examining the Long-Term and Short-Term Effects of Bank Risk Management, Competition Index, and FinTech on the Cost of Capital in Banks Listed on the Tehran Stock Exchange

Abstract

Objective: This study aims to investigate the short-run and long-run effects of bank risk management, competition index, and financial technology (FinTech) on the cost of capital of banks listed on the Tehran Stock Exchange.

Methodology: The research is applied in purpose and descriptive-analytical in nature. The statistical population consists of banks listed on the Tehran Stock Exchange, and the sample includes eleven banks observed over the period 2018–2024. Financial data were extracted from audited financial statements and official banking reports. The dependent variable, cost of capital, was calculated using the Weighted Average Cost of Capital (WACC). Explanatory variables included operational risk, credit risk, market risk, interest rate risk, liquidity risk, inflation risk, competition index, bank performance, FinTech index, bank size, financial stability, and capital adequacy ratio. A panel ARDL model estimated through the Pooled Mean Group (PMG) estimator was employed to analyze both short-run and long-run dynamics. Unit root tests, Kao panel cointegration tests, and diagnostic procedures were conducted to ensure model validity and robustness.

Findings: The empirical results indicate that banking risks—including operational, credit, market, interest rate, liquidity, and general price level risks—have a positive and statistically significant effect on the cost of capital, implying that higher risk exposure increases investors’ required return and financing costs. Conversely, competition intensity, banking performance, FinTech development, bank size, financial stability, and capital adequacy exhibit significant negative relationships with the cost of capital, contributing to cheaper funding conditions. Short-run estimations confirm the statistical significance of most explanatory variables. The negative and significant error correction coefficient demonstrates the existence of long-run equilibrium relationships, indicating that approximately 23% of deviations from long-run equilibrium are corrected within each period.

Conclusion: The study concludes that effective risk management, enhanced competitive structure, improved banking performance, and adoption of financial technologies play decisive roles in reducing banks’ cost of capital and strengthening financial stability. Banks adopting strategic risk governance and digital financial innovation are better positioned to achieve sustainable financing efficiency and long-term equilibrium in capital costs.