Understanding the Information Content of Alternative Cost-of-Equity Proxies

45 Pages Posted: 7 May 2019 Last revised: 6 Aug 2020

See all articles by Soku Byoun

Soku Byoun

Baylor University

Kai Wu

Central University of Finance and Economics (CUFE) - School of Finance

Date Written: August 6, 2020

Abstract

We show that the implied cost of capital (ICC) and factor model-based proxies (FMPs) of cost of equity have negative (positive) association with corporate investment and external financing. ICCs show negative association with corporate investment and external financing by capturing the discount rate news. Such relationship is pronounced in firms with high private information and external finance dependence. By contrast, FMPs show positive association with corporate investment and external financing by capturing cash flow news which are pronounced in firms with low private information and external finance dependence. Our findings suggest that ICCs and FMPs convey distinctive information for corporate investment and financing decisions in different sets of firms.

Keywords: cost of equity; corporate investment; external financing; return decomposition

JEL Classification: G31, G32

Suggested Citation

Byoun, Soku and Wu, Kai, Understanding the Information Content of Alternative Cost-of-Equity Proxies (August 6, 2020). Available at SSRN: https://ssrn.com/abstract=3375143 or http://dx.doi.org/10.2139/ssrn.3375143

Soku Byoun

Baylor University ( email )

Department of Finance Insurance & Real Estate
P.O.Box 98004
Waco, TX 76712
254-710-7849 (Phone)

Kai Wu (Contact Author)

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

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