Inflation, IVOL, the Cost of Capital, and Investment: Jolted by the Unexpected

Lorne N. Switzer (), Nabil El Meslmani () and Radhika Solanki
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Lorne N. Switzer: Concordia University, Professor of Finance, John Molson School of Business
Nabil El Meslmani: Sobey School of Business, Saint Mary’s University
Radhika Solanki: Concordia University, Graduate Student, John Molson School of Business

A chapter in Innovations in Finance, 2026, pp 61-71 from Springer

Abstract: Abstract This chapter investigates the impact of macroeconomic uncertainty and firm-specific uncertainty, as measured by unexpected inflation and idiosyncratic volatility (IVOL), respectively, on the weighted average cost of capital (WACC), and firm investment decisions. Both inflation uncertainty and IVOL have positive and significant impacts on WACC. IVOL is also positively related to capital expenditures, consistent with the strategic growth options model. In contrast with some of the recent literature that does not consider these uncertainty effects, we find support for the classical q theory showing a negative and significant relationship between WACC and capital expenditures.

Keywords: E31; E43; G30; G32; Inflation shocks; Idiosyncratic volatility; Cost-of-capital; Growth options (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:spr:prbchp:978-3-032-19314-8_7

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DOI: 10.1007/978-3-032-19314-8_7

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