The Corporate Cost of Capital and the Return on Corporate Investment

Authors

  • Eugene F. Fama,

    1. Graduate School of Business, University of Chicago
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  • Kenneth R. French

    1. Sloan School of Management, MIT
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    • Graduate School of Business, University of Chicago (Fama) and Sloan School of Management, MIT (French). Discussions with Steven Kaplan, S. P. Kothari, Mark Mitchell, David Scharfstein, and Jeremy Stein have been helpful. We also received valuable comments from René Stulz, a referee, and seminar participants at Harvard, MIT, and the University of Chicago.

ABSTRACT

We estimate the internal rates of return earned by nonfinancial firms on (i) the initial market values of their securities and (ii) the cost of their investments. The return on value is an estimate of the overall corporate cost of capital. The estimate of the real cost of capital for 1950–96 is 5.95 percent. The real return on cost is larger, 7.38 percent, so on average corporate investment seems to be profitable. A by-product of calculating these returns is information about the history of corporate earnings, investment, and financing decisions that is perhaps more interesting than the returns.

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