Investment and the WACC: New Micro Evidence for France

28 Pages Posted: 6 Mar 2019

See all articles by Juan Carluccio

Juan Carluccio

Banque de France; Paris School of Economics

Clément Mazet-Sonilhac

Banque de France; Collège de France; SciencesPo - Sciences Po - Department of Economics

Jean-Stéphane Mésonnier

Banque de France

Date Written: 2018

Abstract

We exploit a new dataset of consolidated balance sheets for some 1,850, mostly nonlisted,
French corporate groups, in order to investigate the relationship between corporate investment and the cost of capital. Our empirical model is motivated by a standard Q-theory of investment and relates the rate of investment to a proxy for profits, the cost of capital and firm- and sector-level controls. We notably construct firm-level measures of the weighted average cost of capital (WACC) that account for industry-specific values of the cost of equity and reflect the actual capital structure of firms. We find a confirmation that a high WACC drags down investment: a one SD increase in the real WACC (+2 pp) is associated on average with a reduction by 0.65 pp in the investment rate. The effect is somewhat larger for manufacturing firms and when firms are highly leveraged or more dependent on external finance. We also investigate the impact of lower competition or higher uncertainty on business investment and do not find evidence in support of any role of these two factors in France in recent years.

Keywords: Business Investment, Cost of Capital, Uncertainty, Competition

JEL Classification: G31; G32

Suggested Citation

Carluccio, Juan and Mazet-Sonilhac, Clément and Mésonnier, Jean-Stéphane, Investment and the WACC: New Micro Evidence for France (2018). Banque de France Working Paper, February 2018, WP #710 , Available at SSRN: https://ssrn.com/abstract=3347543 or http://dx.doi.org/10.2139/ssrn.3347543

Juan Carluccio (Contact Author)

Banque de France ( email )

Paris
France

Paris School of Economics ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

Clément Mazet-Sonilhac

Banque de France ( email )

Paris
France

Collège de France ( email )

11 Place Marcelin Berthelot
Paris, 75231
France

SciencesPo - Sciences Po - Department of Economics ( email )

28, rue des Saints-Pères
Paris, Paris 75007
France

Jean-Stéphane Mésonnier

Banque de France ( email )

Paris
France
+33 (0)1 42 92 91 63 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
128
Abstract Views
652
rank
280,428
PlumX Metrics