Equity Factors and Firms’ Perceived Cost of Capital

60 Pages Posted: 11 Dec 2020 Last revised: 17 Sep 2023

See all articles by Niels Joachim Gormsen

Niels Joachim Gormsen

University of Chicago - Booth School of Business

Kilian Huber

University of Chicago - Booth School of Business

Date Written: January 4, 2023

Abstract

We document large wedges between firms’ perceived cost of capital and the cost of capital implied by expected returns in financial markets. While the perceived cost of capital reflects traditional factors such as the market, size, and value factors, it is unrelated to most other risk factors studied in asset pricing. Less than 10% of all factors in the factor zoo are significantly reflected in the perceived cost of capital and more than half of factors are reflected with the wrong sign. As to investment-based factors, we find that firms with higher investment rates have higher perceived cost of capital, which is inconsistent with the Investment CAPM and challenges the production-based asset pricing paradigm. We also document substantial wedges between firms’ perceived cost of capital and measures of the “implied cost of capital" used in the literature.

JEL Classification: G1, G10, G12, G31, G32, G40

Suggested Citation

Gormsen, Niels Joachim and Huber, Kilian, Equity Factors and Firms’ Perceived Cost of Capital (January 4, 2023). Available at SSRN: https://ssrn.com/abstract=3712699 or http://dx.doi.org/10.2139/ssrn.3712699

Niels Joachim Gormsen (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Kilian Huber

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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