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[2019년 제 4차] Does Corporate Investment Respond to the Time-Varying Cost of Capital? Empirical Evidence
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2019-12-12
I test whether firms take the time-varying cost of capital into account in capital budgeting decisions. This test requires a measure of the conditional cost of equity, and I estimate it nonparametrically using individual equity option prices. I find that corporate investment responds negatively to the option-implied measures of the cost of equity and the weighted average costs of capital. Furthermore, the analysis based on these new measures reveals that empirical investment is equally responsive to the cost of capital and the expected future cash flow, as the theory predicts. This finding suggests that firm managers correctly update their discount rates over time despite the failure of the conventional frameworks – Capital Asset Pricing Model and multi-factor models – in this regard.