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The Causal Relationship between Capital Structure and Cost of Capital: Evidence from ICT Companies Listed at NASDAQ

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Author Info
Aoun, Dany () (Seoul National University)
Heshmati, Almas () (Ratio)

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Abstract

In this study, we intend to examine the Information and Communication Technology (ICT) firms, from a financial perspective. The causal relationship between capital structure and cost of capital is investigated in a simultaneous equation framework. On the one hand, we relate international diversification to the firm’s capital structure, and on the other, we test their individual and collective inferences on the combined debt and equity cost of capital. Even though ICT companies are subject to the same market forces as other firms, the rapid development of the industry, complexity of their technologies and presence of the network effect may have valuable implications in determining their financing patterns. Using information pertaining to ICT and non-ICT firms listed on the NASDAQ stock exchange, we expect a negative correlation between international diversification and higher total and long-term debt ratios, and a reduction in the overall cost of capital. Results suggest significant heterogeneity among ICT and non-ICT firms and within each group by a number of firm characteristics.

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Publisher Info
Paper provided by The Ratio Institute in its series Ratio Working Papers with number 87.

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Length: 26 pages
Date of creation: 25 Apr 2006
Date of revision:
Handle: RePEc:hhs:ratioi:0087

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Related research
Keywords: International diversification; Capital structure; Cost of capital; Debt; ICT; NASDAQ;

Find related papers by JEL classification:
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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