High cost of equity leads to less corporate investment, study finds.
Corporate investment is influenced by the cost of capital. The way we measure the cost of equity affects how firms invest. Using the CAPM model, firms with high cost of equity invest more, but with the implied cost of capital, they invest less. The implied cost of capital better reflects changes in required returns on capital over time, while the CAPM measure includes external factors not accounted for in the standard model.