The weighted average cost of capital over the lifecycle of the firm: Is the overinvestment problem of mature firms intensified by a higher WACC?

Garcia, Carlos; Saravia, Jimmy A.; Yepes, David A.

doi:10.22495/cbv12i2c1art4

Cited by 4 publications

(5 citation statements)

References 17 publications

(2 reference statements)

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“…Therefore, companies' lifecycle theory predicts that the WACC will tend to fall over the lifecycle and will prolong [Mueller 2003]. Thus, the WACC of younger firms is higher than that of mature firms [Garcia et al 2016]. The study results support stated hypothesis H1, H2, H3, according to which the total WACC, equity, and debt distinguish the food companies on emerging and developed markets.…”

Section: Conclusion and Discussionsupporting

confidence: 68%

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Differences in the Cost of Capital: The Case of Food Companies From Emerging and Developed European Economies

Mądra-Sawicka

2020

aspe

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The research aims to assess the cost of capital according to the WACC methodology across the food industry companies. The study also investigates the primary financial indicators for company position on the market as total assets, total revenues, and total equity. The study was conducted among 35 European countries from a sample of 1,274 records. The research period covers the years 2015–2018. The results of the survey underline the current asymmetric information problems in WACC food companies’ assessment between European emerging and developed economies. The emerging markets were characterized by a higher level of the cost of equity and debt. The cost of debt among companies from emerging economies was related to total assets value and revenues, which proves the importance of the size of enterprises in relation to their market assessment.

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Section: Conclusion and Discussionsupporting

confidence: 68%

“…The WACC of younger firms is higher than that of mature firms [Garcia et al 2016]. Also, small firms have limited capital market access and severe asymmetric information problems [Frank and Shen 2016].…”

Section: The Wacc Differences Across Economies and Industriesmentioning

confidence: 98%

Differences in the Cost of Capital: The Case of Food Companies From Emerging and Developed European Economies

Mądra-Sawicka

2020

aspe

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“…The upshot is that because of the abovementioned predictable changes in the structure companies over time, an empirical test designed to study the behavior of beta should find that beta falls over the lifecycle of the firm. So far several papers have provided some evidence supporting firm lifecycle theory's claims regarding the different characteristics of young firms compared to mature firms (Garcia, Saravia and Yepes, 2016;Mueller and Yun, 1998;Saravia, 2014;Saravia and Saravia-Matus, 2016). However, to the best of our knowledge no paper has yet tested empirically whether the market equity betas of young firms are larger than those of mature firms while holding other real determinants of systematic risk constant.…”

Section: Of the Firmmentioning

confidence: 89%

The determinants of systematic risk: A firm lifecycle perspective

2020

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This paper investigates how systematic risk varies over the lifecycle of the firm. If market equity beta is determined by firm characteristics as the literature on the determinants of systematic risk holds, and if those characteristics change over the lifecycle of the firm following a definite pattern as firm lifecycle theory suggests, then market equity beta should change over the lifecycle of the firm following a predictable pattern. Our findings indicate that holding other determinants of beta constant, the coefficient of systematic risk tends to fall in magnitude following a nonlinear pattern as firm age increases. In addition, we find that the volatility of market equity beta also tends to fall over the lifecycle of the firm. We argue that our main variable of concern, that is, firm age, proxies for variables that have hitherto been omitted in the literature on the determinants of systematic risk. In particular, we maintain that firm age proxies for the mispricing propensity that young firms lose as they mature. This research is useful for both practitioners and researchers in that it may suggest ways to adjust empirical estimates of systematic risk. In addition, our results are important for research on beta forecasting as they show that the length of the stationary interval of betas is shorter for young companies, and therefore it is necessary to take into account this time varying characteristic in the estimation process in order to improve the beta forecasting.

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“…Market capitalization was impacted significantly by WACC level; however, this relation was not significant in the case of intra-industry analysis, and its fundamental role was relatively low. For younger firms, WACC is higher than in mature firms [103,104]. It is explained by the fact that new firms' future financial performance is more uncertain to investors.…”

Section: Discussionmentioning

confidence: 99%

Energy Sector Risk and Cost of Capital Assessment—Companies and Investors Perspective

2021

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This paper aims to identify the costs of capital in a group of companies from the energy sector by including an investor and market risk approach. The study also concerns the company’s Weighted Average Cost of Capital (WACC) cost intra-industry analysis related to sector characteristics such as total assets, revenues, market capitalization, and companies’ age. In order to assess the intergroup relationships, basic correlation relationships were compared and a nonparametric test of variance was performed. The period under study covered the years 2015–2019. The conducted research evaluates groups of companies that dedicated their activity to a particular energy intra-industry division under numerous regulations in Europe. The study contributes to assessing the level of risk among energy listed companies in European capital markets based on capital structure valuation. The study results underline the role of the cost of equity financing, which was twice as high as the cost of debt. The highest WACC was related to the Beta indicator that also expressed the political and regulatory risk over the investigated period. Across debt cost analysis, the role of effective tax rate decreased the level of WACC. The highest level of WACC was noticed among uranium and integrated oil and gas companies. The study contributes to information asymmetry theory related to the cost of capital assumptions.

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The weighted average cost of capital over the lifecycle of the firm: Is the overinvestment problem of mature firms intensified by a higher WACC?

Cited by 4 publications

References 17 publications

Differences in the Cost of Capital: The Case of Food Companies From Emerging and Developed European Economies

Differences in the Cost of Capital: The Case of Food Companies From Emerging and Developed European Economies

The determinants of systematic risk: A firm lifecycle perspective

Energy Sector Risk and Cost of Capital Assessment—Companies and Investors Perspective

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