Investment and the Weighted Average Cost of Capital
51 Pages Posted: 4 Mar 2012 Last revised: 20 Jul 2015
Date Written: April 24, 2015
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 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 may better reflect the time-varying required return on capital. The CAPM measure reflects forces that are outside the standard model.
Keywords: Weighted average cost of capital, investment, CAPM, implied cost of capital
JEL Classification: G31; G32
Suggested Citation: Suggested Citation