CRSP Working Paper
31 Pages Posted: 11 Aug 1998
Date Written: April 1998
We estimate two internal rates of return for the non-financial corporate sector: (i) the return on the initial market values of the securities issued by firms, and (ii) the return on the cost of their investments. The return on cost is the return delivered by firms on investment outlays. The return on value is an estimate of the overall corporate cost of capital, that is, the return on investment required by the capital market. The estimate of the corporate cost of capital for 1950-96 is 10.72 percent. The return on cost is larger, 12.11 percent, so on average corporate investment seems to be profitable. A byproduct of calculating these returns is information about the history of corporate earnings, investment, and financing decisions that is perhaps more interesting than the returns themselves.
JEL Classification: G30
Suggested Citation: Suggested Citation
Fama, Eugene F. and French, Kenneth R., The Corporate Cost of Capital and the Return on Corporate Investment (April 1998). CRSP Working Paper. Available at SSRN: https://ssrn.com/abstract=75999 or http://dx.doi.org/10.2139/ssrn.75999
By Eugene Fama