Investors perceive firms with higher levels of inflexibility, such as not being able to scale operations or adapt to changes in profitability, as being riskier and have a higher implied cost of equity, researchers conclude in a new paper. This research confirms what some would say is common sense, that a firm with a better ability to adjust to market conditions will fare better than one that cannot. Examining a large sample of manufacturing firms over the period 1989 to 2018, the researchers’ conclusions are consistent with prior similar research. They also found that the impact of firm inflexibility on cost of equity capital is greater for small firms. The paper is “Firm Inflexibility and the Implied Cost of Equity,” by Sadok El Ghoul (University of Alberta), Zhengwei Fu (University of South Carolina), Omrane Guedhami (University of South Carolina), and Samir Saadi (University of Ottawa), is available if you click here.
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