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Corporate life cycle and cost of equity capital

Mostafa Monzur Hasan, Mahmud Hossain, Adrian (Wai-Kong) Cheung and Ahsan Habib

Journal of Contemporary Accounting and Economics, 2015, vol. 11, issue 1, 46-60

Abstract: This paper investigates the effect of the corporate life cycle on the cost of equity capital. Using a sample of Australian firms between 1990 and 2012, we find that the cost of equity capital varies over the life cycle of the firm. In particular, using Dickinson's (2011) life cycle measure, we find that the cost of equity is higher in the introduction and decline stages and lower in the growth and mature stages, resembling a U-shaped pattern. When DeAngelo, DeAngelo, and Stulz's (2006) life cycle measure – earned/contributed capital mix (RE/TA) – is used, we find that the cost of equity decreases as retained earnings as a proportion of total asset increases after controlling for other firm characteristics and unobserved heterogeneity. These findings are shown to be robust using a series of sensitivity tests.

Keywords: Cost of equity; Firm life cycle; Earned equity; Contributed capital (search for similar items in EconPapers)
JEL-codes: D21 G12 G30 L22 (search for similar items in EconPapers)
Date: 2015
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Journal of Contemporary Accounting and Economics is currently edited by Agnes C.S. Cheng, P. Clarkson, F.A. Gul, Zoltan Matolcsy, Dan Simunic and Ben Srinidhi

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