Abstract

http://ssrn.com/abstract=2014367
 
 

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Investment and the Weighted Average Cost of Capital


Murray Z. Frank


University of Minnesota

Tao Shen


Tsinghua University

September 4, 2014


Abstract:     
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

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Date posted: March 4, 2012 ; Last revised: September 5, 2014

Suggested Citation

Frank, Murray Z. and Shen, Tao, Investment and the Weighted Average Cost of Capital (September 4, 2014). Available at SSRN: http://ssrn.com/abstract=2014367 or http://dx.doi.org/10.2139/ssrn.2014367

Contact Information

Murray Z. Frank (Contact Author)
University of Minnesota ( email )
Carlson School of Management
321 19th Avenue South
Minneapolis, MN 55455
United States
612-625-5678 (Phone)
Tao Shen
Tsinghua University ( email )
Department of Finance
School of Economics and Management
China
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