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Corporate life cycle and cost of equity capital

Author

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  • Hasan, Mostafa Monzur
  • Hossain, Mahmud
  • Cheung, Adrian (Wai-Kong)
  • Habib, Ahsan

Abstract

This paper investigates the effect of the corporate life cycle on the cost of equity capital. Using a sample of Australian firms between 1990 and 2012, we find that the cost of equity capital varies over the life cycle of the firm. In particular, using Dickinson's (2011) life cycle measure, we find that the cost of equity is higher in the introduction and decline stages and lower in the growth and mature stages, resembling a U-shaped pattern. When DeAngelo, DeAngelo, and Stulz's (2006) life cycle measure – earned/contributed capital mix (RE/TA) – is used, we find that the cost of equity decreases as retained earnings as a proportion of total asset increases after controlling for other firm characteristics and unobserved heterogeneity. These findings are shown to be robust using a series of sensitivity tests.

Suggested Citation

  • Hasan, Mostafa Monzur & Hossain, Mahmud & Cheung, Adrian (Wai-Kong) & Habib, Ahsan, 2015. "Corporate life cycle and cost of equity capital," Journal of Contemporary Accounting and Economics, Elsevier, vol. 11(1), pages 46-60.
    • Handle: RePEc:eee:jocaae:v:11:y:2015:i:1:p:46-60
    DOI: 10.1016/j.jcae.2014.12.002
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    More about this item

    Keywords

    Cost of equity; Firm life cycle; Earned equity; Contributed capital;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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