One of the most important components of any economic activity is the provision of financial resources. The required financial resources can be provided from equity or debt. The basic question is “which of these resources should be used over the lifetime of an economic firm?” In the financing, the composition of debt and equity represents the structure of capital. The policy of capital structure creates a balance between risk and returns. Using more debt will increase the risk of the company's profitability while, lead to higher expected returns. The risk of using more debt reduces stock prices, while, its expected higher returns will increase stock prices. The purpose of the present study was investigating the effect of financial development on cost of equity capital in firms listed on the Tehran Stock Exchange. The statistical population consisted of all firms listed on the TSE, and the statistical sample was chosen by applying the Systematic Removal Method including 127 firms over the period from 2009 to 2016. Therefore, theoretical foundations were collected, and the research hypotheses were compiled, after that the necessary information from the set of studied companies was gathered and prepared. In order to examine the hypotheses, the correlation coefficient and multiple regression were used. Research findings indicated that stock market development and banking development had a positive and significant effect on the cost of equity capital. Also, the coefficients and the significance level of the t-statistic of the control variables indicated that the beta, firm size and profitability of the firm were effective on the cost of equity.
