Informational content of the cost of equity capital: empirical evidence

Abstract

PurposeThe effect of the cost of capital CEC on the investing and financing decisions is a matter of considerable interest and importance to the financial studies. However, the impact of CEC on the stock prices is not well established. This research aims to examine whether the CEC has a significant incremental explanation of the changes in the stock prices which the basic traditional accounting variables could not provide.Design/methodology/approachApplies the adjusted constant dividend‐growth model to measure the CEC and the incremental explanatory power test on a sample of 37 companies listed on NYSE.FindingsThe results indicate that there is non‐significant impact of CEC for the full sample, the small size firms, and the manufacturing firms. However, I find an evidence that CEC has a significant impact on the stock prices for both the large‐size firms and the non‐manufacturing firms.Research limitations/implicationsThe study was completed at a specific date of measurement which puts some limitations on the generality of its results.Originality/valueAssesses whether the cost of equity possess incremental explanation to the change in the stock prices beyond the explanation provided by the traditional accounting variables.