Investment and the weighted average cost of capital

Murray Z. Frank, Tao Shen

Research output: Contribution to journalArticlepeer-review

44 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)300-315
Number of pages16
JournalJournal of Financial Economics
Volume119
Issue number2
DOIs
StatePublished - Feb 1 2016

Bibliographical note

Publisher Copyright:
© 2015.

Copyright:
Copyright 2016 Elsevier B.V., All rights reserved.

Keywords

  • CAPM
  • Implied cost of capital
  • Investment
  • Weighted average cost of capital

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