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

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dc.contributor.authorGarcía, Carlos S
dc.contributor.authorSaravia, Jimmy A
dc.contributor.authorYepes, David A
dc.contributor.eafitauthorcgarci73@eafit.edu.co
dc.contributor.eafitauthorjsaravia@eafit.edu.co
dc.contributor.eafitauthordyepesr@eafit.edu.co
dc.coverage.spatialMedellín de: Lat: 06 15 00 N degrees minutes Lat: 6.2500 decimal degrees Long: 075 36 00 W degrees minutes Long: -75.6000 decimal degreeseng
dc.date.accessioned2015-11-23T23:38:53Z
dc.date.available2015-11-23T23:38:53Z
dc.date.issued2016-01-18
dc.description.abstractFirm lifecycle theory predicts that the Weighted Average Cost of Capital (WACC) will tend to fall over the lifecycle of the firm (Mueller, 2003, p. 80-81). However, given that previous research finds that corporate governance deteriorates as firms get older (Mueller and Yun, 1998; Saravia, 2014) there is good reason to suspect that the opposite could be the case, that is, that the WACC is higher for older firms. Since our literature review indicates that no direct tests to clarify this question have been carried out up till now, this paper aims to fill the gap by testing this prediction empirically. Our findings support the proposition that the WACC of younger firms is higher than that of mature firms. Thus, we find that the mature firm overinvestment problem is not intensified by a higher cost of capital, on the contrary, our results suggest that mature firms manage to invest in negative net present value projects even though they have access to cheaper capital. This finding sheds new light on the magnitude of the corporate governance problems found in mature firms.eng
dc.identifier.jelD23
dc.identifier.jelG12
dc.identifier.jelG30
dc.identifier.jelG31
dc.identifier.jelG34
dc.identifier.urihttp://hdl.handle.net/10784/7762
dc.language.isoengeng
dc.publisherUniversidad EAFITspa
dc.publisher.departmentEscuela de Economía y Finanzasspa
dc.rights.accessrightsinfo:eu-repo/semantics/openAccesseng
dc.rights.localAcceso abiertospa
dc.subject.keywordWACCeng
dc.subject.keywordCMPCspa
dc.subject.keywordfirm lifecycleeng
dc.subject.keywordciclo de vida de la firmaspa
dc.subject.keywordcorporate governanceeng
dc.subject.keywordgobierno corporativospa
dc.subject.keywordoverinvestmenteng
dc.subject.keywordsobreinversiónspa
dc.titleThe weighted average cost of capital over the lifecycle of the firm: is the overinvestment problem of mature firms intensified by a higher WACC?eng
dc.typeworkingPapereng
dc.typeinfo:eu-repo/semantics/workingPapereng
dc.type.hasVersiondrafteng
dc.type.localDocumento de trabajo de investigaciónspa

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