In a earlier post I discussed why the price of debt has little affect on investments. What about the cost of fairness? Companies typically use (much) more fairness than debt to finance their investments. So the price of fairness should matter more. In a current research , Murray Frank and Tao Shen examine how the cost of equity and the weighted average price of capital (WACC) affect investments of US firms. Remarkably, they find that the price of equity and the WACC are positively related to company investments. Corporations with the next estimated cost of fairness and WACC have a tendency to take a position significantly extra. That could be a very strange result. We’d expect firms with a high cost of capital to take a position much less, not more.
Such scandalous retail apply was doubtless its approach of responding to pressures to sustain efficiency. Banks these days enhance … Read more