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Investment and the WACC: new micro evidence for France

Author

Listed:
  • Juan Carluccio
  • Clément Mazet-Sonilhac
  • Jean-Stéphane Mésonnier

Abstract

We exploit a new dataset of consolidated balance sheets for some 1,850, mostly nonlisted, French corporate groups, in order to investigate the relationship between corporate investment and the cost of capital. Our empirical model is motivated by a standard Q-theory of investment and relates the rate of investment to a proxy for profits, the cost of capital and firm- and sector-level controls. We notably construct firm-level measures of the weighted average cost of capital (WACC) that account for industry-specific values of the cost of equity and reflect the actual capital structure of firms. We find a confirmation that a high WACC drags down investment: a one SD increase in the real WACC (+2 pp) is associated on average with a reduction by 0.65 pp in the investment rate. The effect is somewhat larger for manufacturing firms and when firms are highly leveraged or more dependent on external finance. We also investigate the impact of lower competition or higher uncertainty on business investment and do not find evidence in support of any role of these two factors in France in recent years.

Suggested Citation

  • Juan Carluccio & Clément Mazet-Sonilhac & Jean-Stéphane Mésonnier, 2019. "Investment and the WACC: new micro evidence for France," Working papers 710, Banque de France.
    • Handle: RePEc:bfr:banfra:710
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    Cited by:

    1. Matthieu Lemoine & Harri Turunen & Mohammed Chahad & Antoine Lepetit & Anastasia Zhutova & Pierre Aldama & Pierrick Clerc & Jean-Pierre Laffargue, 2019. "The FR-BDF Model and an Assessment of Monetary Policy Transmission in France, Working Paper Series no. 736, Banque de France," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-02400611, HAL.
    2. Matthieu Lemoine & Harri Turunen & Mohammed Chahad & Antoine Lepetit & Anastasia Zhutova & Pierre Aldama & Pierrick Clerc & Jean-Pierre Laffargue, 2019. "The FR-BDF Model and an Assessment of Monetary Policy Transmission in France," Working papers 736, Banque de France.
    3. Krzysztof Jarosinski, 2021. "Cost-Effectiveness Analysis (CEA) of Public Investment Projects," European Research Studies Journal, European Research Studies Journal, vol. 0(3B), pages 769-786.
    4. Mathias Lé & Frédéric Vinas, 2020. "The Financing of Investment: Firm Size, Asset Tangibility and the Size of Investment," Working papers 777, Banque de France.

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    More about this item

    Keywords

    Business Investment; Cost of Capital; Uncertainty; Competition;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • 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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