Does Corporate Investment Respond to the Time-Varying Cost of Capital? Empirical Evidence

Research output: Conference Papers (RGC: 31A, 31B, 32, 33)32_Refereed conference paper (no ISBN/ISSN)peer-review

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Original languageEnglish
Publication statusPublished - 8 Jul 2019

Conference

Title31st Asian Finance Association Annual Meeting
LocationUniversity of Economics Ho Chi Minh City
PlaceViet Nam
CityHo Chi Minh
Period7 - 9 July 2019

Abstract

I examine whether the time-varying cost of capital is considered in firms' capital budgeting decisions. For this test, I measure the conditional cost of equity, using individual equity option prices. I find that corporate investment responds negatively to fluctuations in the option-implied cost of equity and the weighted average costs of capital. Furthermore, through decomposing marginal $q$, I reveal that cost-of-capital elasticity of empirical investment is almost identical to its productivity elasticity, as theory predicts. These findings suggest that firms' discount rates are updated accurately in practice despite the failure of conventional frameworks, such as factor-based models, in this regard.

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Citation Format(s)

Does Corporate Investment Respond to the Time-Varying Cost of Capital? Empirical Evidence. / Kim, Yongjin.

2019. Paper presented at 31st Asian Finance Association Annual Meeting, Ho Chi Minh, Viet Nam.

Research output: Conference Papers (RGC: 31A, 31B, 32, 33)32_Refereed conference paper (no ISBN/ISSN)peer-review