Does relative (absolute) efficiency affect capital costs?

MALI, Dafydd and LIM, Hyoung-Joo (2021). Does relative (absolute) efficiency affect capital costs? Annals of Operations Research.

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Official URL: https://link.springer.com/article/10.1007/s10479-0...
Open Access URL: https://link.springer.com/content/pdf/10.1007/s104... (Published version)
Link to published version:: https://doi.org/10.1007/s10479-021-04159-0
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    Abstract

    In this paper, we examine the effect of relative/absolute firm efficiency on weighted average cost of capital (WACC). Using a sample of Korean listed firms, we find that WACC is negatively associated with relative firm efficiency (operational performance) suggesting that firms with higher (lower) relatively efficiency are expected to pay lower (higher) capital costs. When we repeat our analysis using absolute firm efficiency (ROA), we do not find a statistically significant relationship. Our results suggest relative efficiency which is estimated as output (sales) divided by the resources that are directly under the control of management is assessed by capital providers and impounded into a firm’s capital costs. Absolute efficiency (ROA) which is estimated as sales divided by total assets is not. Our results suggest that simple accounting ratios used in the accounting literature are not considered as informative to explain borrowing costs compared to relative efficiency that captures managerial operational performance.

    Item Type: Article
    Identification Number: https://doi.org/10.1007/s10479-021-04159-0
    Depositing User: Colin Knott
    Date Deposited: 30 Jul 2021 08:36
    Last Modified: 30 Jul 2021 08:45
    URI: http://shura.shu.ac.uk/id/eprint/28893

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