Does relative (absolute) efficiency affect capital costs?

Mali, Dafydd; Lim, Hyoung-Joo

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.

Citation

Mali, D., & Lim, H. (2022). Does relative (absolute) efficiency affect capital costs?. Annals of Operations Research, 315(2), 1037-1060. https://doi.org/10.1007/s10479-021-04159-0

• Journal Article Type: Article
• Acceptance Date: Jun 10, 2021
• Online Publication Date: Jul 10, 2021
• Publication Date: 2022-08
• Deposit Date: Nov 1, 2022
• Publicly Available Date: Nov 1, 2022
• Journal: Annals of Operations Research
• Print ISSN: 0254-5330
• Electronic ISSN: 1572-9338
• Peer Reviewed: Peer Reviewed
• Volume: 315
• Issue: 2
• Pages: 1037-1060
• DOI: https://doi.org/10.1007/s10479-021-04159-0
• Keywords: Business Analytics and Operations Research, Firm efficiency, DEA, Cost of capital, WACC, Risk, A1, G1, G3, M1, M4
• Public URL: https://nottingham-repository.worktribe.com/output/10071383
• Publisher URL: https://link.springer.com/article/10.1007/s10479-021-04159-0