TY - JOUR
T1 - Investment and the weighted average cost of capital
AU - Frank, Murray Z.
AU - Shen, Tao
N1 - Publisher Copyright:
© 2015.
PY - 2016/2/1
Y1 - 2016/2/1
N2 - 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.
AB - 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.
KW - CAPM
KW - Implied cost of capital
KW - Investment
KW - Weighted average cost of capital
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U2 - 10.1016/j.jfineco.2015.09.001
DO - 10.1016/j.jfineco.2015.09.001
M3 - Article
AN - SCOPUS:84956605567
SN - 0304-405X
VL - 119
SP - 300
EP - 315
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 2
ER -