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Does relative (absolute) efficiency affect capital costs?

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  • Dafydd Mali

    (University of Nottingham)

  • Hyoung-Joo Lim

    (Kyonggi University)

Abstract

In this paper, we examine the effect of relative/absolute firm efficiency on weighted average cost of capital (WACC). Using a sample of Korean listed firms, we find that WACC is negatively associated with relative firm efficiency (operational performance) suggesting that firms with higher (lower) relatively efficiency are expected to pay lower (higher) capital costs. When we repeat our analysis using absolute firm efficiency (ROA), we do not find a statistically significant relationship. Our results suggest relative efficiency which is estimated as output (sales) divided by the resources that are directly under the control of management is assessed by capital providers and impounded into a firm’s capital costs. Absolute efficiency (ROA) which is estimated as sales divided by total assets is not. Our results suggest that simple accounting ratios used in the accounting literature are not considered as informative to explain borrowing costs compared to relative efficiency that captures managerial operational performance.

Suggested Citation

  • Dafydd Mali & Hyoung-Joo Lim, 2022. "Does relative (absolute) efficiency affect capital costs?," Annals of Operations Research, Springer, vol. 315(2), pages 1037-1060, August.
    • Handle: RePEc:spr:annopr:v:315:y:2022:i:2:d:10.1007_s10479-021-04159-0
    DOI: 10.1007/s10479-021-04159-0
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    Cited by:

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    2. Hyoung-Joo Lim & Dafydd Mali, 2024. "An analysis of the effect of audit effort (hours) on stock price volatility: evidence of increasing demand reducing uncertainty," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 21(3), pages 359-375, September.

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    Keywords

    Firm efficiency; DEA; Cost of capital; WACC; Risk;
    All these keywords.

    JEL classification:

    • A1 - General Economics and Teaching - - General Economics
    • G1 - Financial Economics - - General Financial Markets
    • G3 - Financial Economics - - Corporate Finance and Governance
    • M1 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting

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