Investment and the Weighted Average Cost of Capital
Murray Z. Frank
University of Minnesota
September 4, 2014
This paper is a study of the impact of the weighted average cost of capital on corporate investment. Analytically q is decomposed into a cash flow component and a cost of capital component. Empirically firms with a high cost of debt and with high leverage invest less. When the cost of equity is estimated using the CAPM (or a related factor model) the cost of equity has a positive effect on investment. When the cost of equity is inferred from the Gordon growth model (or a related implied cost of equity capital) high cost of equity firms invest less.
Number of Pages in PDF File: 48
Keywords: Weighted average cost of capital, investment, CAPM, implied cost of capital
JEL Classification: G31; G32
Date posted: March 4, 2012 ; Last revised: September 5, 2014
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