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The Corporate Cost of Capital and the Return on Corporate Investment

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  • Eugene F. Fama

    (Graduate School of Business, University of Chicago,)

  • Kenneth R. French

    (Sloan School of Management, MIT)

Abstract

We estimate the internal rates of return earned by nonfinancial firms on (i) the initial market values of their securities and (ii) the cost of their investments. The return on value is an estimate of the overall corporate cost of capital. The estimate of the real cost of capital for 1950-96 is 5.95 percent. The real return on cost is larger, 7.38 percent, so on average corporate investment seems to be profitable. A by-product of calculating these returns is information about the history of corporate earnings, investment, and financing decisions that is perhaps more interesting than the returns. Copyright The American Finance Association 1999.

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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 54 (1999)
Issue (Month): 6 (December)
Pages: 1939-1967

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Handle: RePEc:bla:jfinan:v:54:y:1999:i:6:p:1939-1967

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Cited by:
  1. Borja Larrain & Motohiro Yogo, 2007. "Does Firm Value Move Too Much to be Justified by Subsequent Changes in Cash Flow?," NBER Working Papers 12847, National Bureau of Economic Research, Inc.
  2. Robert E. Hall, 2000. "The stock market and capital accumulation," Proceedings, Federal Reserve Bank of San Francisco, issue Apr.
  3. Panayiotis Artikis & Georgia Nifora, 2012. "Capital Structure, Macroeconomic Variables & Stock Returns. Evidence from Greece," International Advances in Economic Research, Springer, vol. 18(1), pages 87-101, February.
  4. Richard C. Green & Burton Hollifield, . "The Personal-Tax Advantages of Equity," GSIA Working Papers 2000-E10, Carnegie Mellon University, Tepper School of Business.
  5. Malcolm Baker & Jeffrey Wurgler, 2000. "The Equity Share in New Issues and Aggregate Stock Returns," Journal of Finance, American Finance Association, vol. 55(5), pages 2219-2257, October.
  6. Linn, Scott C. & Stock, Duane R., 2005. "The impact of junior debt issuance on senior unsecured debt's risk premiums," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1585-1609, June.
  7. Prezas, Alexandros P., 2009. "Internal capital markets, empire building, and capital structure," Journal of Economics and Business, Elsevier, vol. 61(3), pages 173-188.
  8. Steve Keen, 2011. "Debunking Macroeconomics," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 41(3), pages 147-168, December.
  9. Panayotis Artikis & Georgia Nifora, 2011. "Leverage and Returns in Three Countries of Southern European Region," European Research Studies Journal, European Research Studies Journal, vol. 0(4), pages 3-26.
  10. Kryzanowski, Lawrence & Mohsni, Sana, 2010. "Capital returns, costs and EVA for Canadian firms," The North American Journal of Economics and Finance, Elsevier, vol. 21(3), pages 256-273, December.

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