Most textbooks suggest factor models like Capital Asset Pricing Model and the Fama and French (1992, 1993) model to estimate the cost of equity. Recent studies question this practice. We examine the attributes of the implied cost of capital (ICC) as an alternative cost of equity measure. Our results show that the ICC has negative effects on investment and equity issuance, whereas the factor model estimates have opposite effects on these decisions. We find that such opposite effects of the CAPM and FFM estimates on investment and financing decisions are attributed to the way in which stock prices refl
ect cashflow news and discount rate news. Moreover, the ICC exhibits the properties of the cost of equity regarding equity dependence, private information, and capital supply shocks, whereas the factor model estimates fail to do so. Our ndings lend support for the ICC as the cost of equity in the capital budgeting process.
Keywords: Implied Cost of Capital; Corporate Investment; Cash Flow News; Discount Rate News
JEL Classification: G31; G32
[2015년 제 4차] Sensitivities of Corporate Investment and Financing
작성자 : 관리자
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2015-12-30
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