Corporate Life Cycle and Cost of Equity Capital

Journal of Contemporary Accounting & Economics, Volume 11, Issue 1

42 Pages Posted: 23 Dec 2013 Last revised: 7 Feb 2015

See all articles by Mostafa Monzur Hasan

Mostafa Monzur Hasan

Macquarie University

Mahmud Hossain

King Fahd University of Petroleum & Minerals - Department of Accounting and MIS

Adrian (Wai-kong) Cheung

Flinders University

Ahsan Habib

Massey University - School of Accountancy; Massey University

Date Written: January 01, 2015

Abstract

This paper investigates the impact of the corporate life cycle on the cost of equity capital. Using a sample of Australian firms during the years 1990–2012, we find that the proxies for the cost of equity capital vary across the life cycle of the firm. In particular, we find that the cost of equity declines as the earned/contributed capital mix (a proxy for the firm life cycle) increases, after controlling for other relevant firm characteristics and unobserved heterogeneity. Moreover, when different stages of the firm life cycle are taken into account, we find that the cost of equity is higher in the introduction and decline stages and lower in the growth and mature stages, resembling a ‘U’ shaped pattern. These findings are robust when subjected to a series of sensitivity tests. Collectively, the results are consistent with the notion that firms in the introduction (or decline) stages are more risky in the sense that their resource base, competitive advantages and capabilities are limited (concentrated), while those in the growth and mature stages are relatively less risky due to the richness and diversity of their resource base, competitive advantages and capability. Hence, the market demands a higher risk premium for the former than for the latter.

Keywords: Cost of equity; Firm life cycle; Earned equity; Contributed capital

JEL Classification: D21, G12, G30, L22

Suggested Citation

Hasan, Mostafa Monzur and Hossain, Mahmud and Cheung, Adrian and Habib, Ahsan, Corporate Life Cycle and Cost of Equity Capital (January 01, 2015). Journal of Contemporary Accounting & Economics, Volume 11, Issue 1, Available at SSRN: https://ssrn.com/abstract=2370970 or http://dx.doi.org/10.2139/ssrn.2370970

Mostafa Monzur Hasan (Contact Author)

Macquarie University ( email )

Level 3, Building 4ER,
Sydney, NSW 2109
Australia

HOME PAGE: http://https://researchers.mq.edu.au/en/persons/mostafa-hasan

Mahmud Hossain

King Fahd University of Petroleum & Minerals - Department of Accounting and MIS ( email )

Department of Accounting and MIS
College of Industrial Management. KFUPM Box 5076
Dhahran, 31261
Saudi Arabia
+966 13 860 8496 (Phone)
+966 13 860 3489 (Fax)

HOME PAGE: http://www4.kfupm.edu.sa/cim/acct_mis.html

Adrian Cheung

Flinders University ( email )

GPO Box 2100
Adelaide S.A. 5001, SA 5063
Australia
+618 8201 5831 (Phone)

Ahsan Habib

Massey University - School of Accountancy ( email )

Auckland
New Zealand

Massey University ( email )

Auckland
New Zealand

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