Corporate life cycle and cost of equity capital

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

*Corresponding author for this work

Research output: Contribution to journalArticle

36 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)46-60
Number of pages15
JournalJournal of Contemporary Accounting and Economics
Volume11
Issue number1
DOIs
Publication statusPublished - 1 Apr 2015
Externally publishedYes

Keywords

  • Contributed capital
  • Cost of equity
  • Earned equity
  • Firm life cycle

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