Abstract

http://ssrn.com/abstract=2014367
 
 

References (47)



 


 



Investment, Q, and the Weighted Average Cost of Capital


Murray Z. Frank


University of Minnesota

Tao Shen


Tsinghua University

March 1, 2012


Abstract:     
Finance textbooks recommend evaluating investments by calculating the net present value of the free cash flows using the weighted average cost of capital (WACC). In contrast, scholarly studies estimate the impact of Q and cash flow on corporate investment. This paper brings these together by examining the impact of WACC on investment regressions, using 440 alternative implementations of the WACC for US firms from 1960 to 2010. WACC contains significant information not impounded in empirical Q. When the common financial constraint indices are used, WACC has a similar impact on investment for both the constrained and the unconstrained firms. When WACC is decomposed, all elements have effects on investment. The elasticities of investment with respect to leverage and taxation, are larger than the elasticities of investment with respect to Q and cash flow.

Number of Pages in PDF File: 65

Keywords: Investment, Q, WACC, Financial Constraint Index

JEL Classification: G31

working papers series


Download This Paper

Date posted: March 4, 2012 ; Last revised: September 27, 2012

Suggested Citation

Frank, Murray Z. and Shen, Tao, Investment, Q, and the Weighted Average Cost of Capital (March 1, 2012). 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
Feedback to SSRN


Paper statistics
Abstract Views: 2,295
Downloads: 680
Download Rank: 137,985
References:  47
People who downloaded this paper also downloaded:
1. Beyond Q: Investment without Asset Prices
By Vito Gala and Joao Gomes

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo7 in 0.500 seconds