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Firm inflexibility and the implied cost of equity

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  • El Ghoul, Sadok
  • Fu, Zhengwei
  • Guedhami, Omrane
  • Saadi, Samir

Abstract

Using a large dataset of manufacturing firms from 65 countries, we examine whether and how firm inflexibility influences implied cost of equity over the period 1989–2018. We find that, on average, a firm with higher level of inflexibility have a higher implied cost of equity. These results are consistent with the view that investors perceive firms with higher levels of inflexibility as risky firms. Our findings are robust to alternative proxies for firm inflexibility and cost of equity capital. We also show that the effects of firm inflexibility on implied cost of equity are stronger for small firms and firms located in more-developed countries.

Suggested Citation

  • El Ghoul, Sadok & Fu, Zhengwei & Guedhami, Omrane & Saadi, Samir, 2023. "Firm inflexibility and the implied cost of equity," Finance Research Letters, Elsevier, vol. 52(C).
    • Handle: RePEc:eee:finlet:v:52:y:2023:i:c:s1544612322007152
    DOI: 10.1016/j.frl.2022.103539
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    References listed on IDEAS

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    Cited by:

    1. Roi D. Taussig, 2024. "Operating Cost Flexibility and Implications for Stock Returns," Risks, MDPI, vol. 12(10), pages 1-7, October.
    2. Xiaohui Xin & Ruoyu Zhu & Guoli Ou, 2024. "Does digital transformation lower equity financing costs? An explanation based on the “return-risk-expectation” framework," Economic Change and Restructuring, Springer, vol. 57(2), pages 1-26, April.

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    More about this item

    Keywords

    Firm inflexibility; Cost of equity;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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