Investment and the weighted average cost of capital

Murray Frank () and Tao Shen

Journal of Financial Economics, 2016, vol. 119, issue 2, 300-315

Abstract: In a standard q-theory model, corporate investment is negatively related to the cost of capital. Empirically, we find that the weighted average cost of capital matters for corporate investment. The form of the impact depends on how the cost of equity is measured. When the capital asset pricing model (CAPM) is used, firms with a high cost of equity invest more. When the implied cost of capital is used, firms with a high cost of equity invest less. The implied cost of capital can better reflect the time-varying required return on capital. The CAPM measure reflects forces that are outside the standard model.

Keywords: Weighted average cost of capital; Investment; CAPM; Implied cost of capital (search for similar items in EconPapers)
JEL-codes: G31 G32 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (60)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:119:y:2016:i:2:p:300-315

DOI: 10.1016/j.jfineco.2015.09.001

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