Corporate Financial Management: Time to Change the Cost of Capital Paradigm?
39 Pages Posted: 31 Jan 2003
The paper considers the nature of theoretical frameworks as they are predicated by their paradigm assumptions. We argue that although a paradigm shift may occur as the refutation of a prevailing paradigm, it is at least as likely to occur as the recognition that patterns of understanding may be structured more readily around an alternative set of key-note assumptions, a view that we support with examples of paradigm shifts as they have occurred in the physical sciences. In the context of these considerations, the paper assesses the cost of capital paradigm of corporate financial theory, its contribution to development and understanding, as well as the case for dissatisfaction. The case is presented for an alternative paradigm of key-note assumptions about (i) reputations based on past performance and (ii) commitment and trust relationships, for corporate financial management, by which both theory and field-study investigations might continue to be stimulated and developed.
Keywords: Corporate finance, financial management, behavioral finance, cost of capital, investment decision-making, capital structure, dividend policy, positive theory, Modigliani and Miller, Kuhn, paradigm shift
JEL Classification: G31, G32
Suggested Citation: Suggested Citation