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Inflation, IVOL, the Cost of Capital, and Investment: Jolted by the Unexpected

Author

Listed:
  • Lorne N. Switzer

    (Concordia University, Professor of Finance, John Molson School of Business)

  • Nabil El Meslmani

    (Sobey School of Business, Saint Mary’s University)

  • Radhika Solanki

    (Concordia University, Graduate Student, John Molson School of Business)

Abstract

This chapter investigates the impact of macroeconomic uncertainty and firm-specific uncertainty, as measured by unexpected inflation and idiosyncratic volatility (IVOL), respectively, on the weighted average cost of capital (WACC), and firm investment decisions. Both inflation uncertainty and IVOL have positive and significant impacts on WACC. IVOL is also positively related to capital expenditures, consistent with the strategic growth options model. In contrast with some of the recent literature that does not consider these uncertainty effects, we find support for the classical q theory showing a negative and significant relationship between WACC and capital expenditures.

Suggested Citation

  • Lorne N. Switzer & Nabil El Meslmani & Radhika Solanki, 2026. "Inflation, IVOL, the Cost of Capital, and Investment: Jolted by the Unexpected," Springer Proceedings in Business and Economics,, Springer.
    • Handle: RePEc:spr:prbchp:978-3-032-19314-8_7
    DOI: 10.1007/978-3-032-19314-8_7
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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