Scandinavian Working Papers in Economics

Ratio Working Papers,
The Ratio Institute

No 87: The Causal Relationship between Capital Structure and Cost of Capital: Evidence from ICT Companies Listed at NASDAQ

Dany Aoun () and Almas Heshmati ()
Additional contact information
Dany Aoun: Seoul National University, Postal: Techno-Economics & Policy Program, , College of Engineering, Seoul National University,San 56-1, Shinlim-dong, Kwanak-gu, , Seoul 151-742, Korea,
Almas Heshmati: Ratio, Postal: P.O. Box 5095, SE-102 42 Stockholm, Sweden

Abstract: In this study, we intend to examine the Information and Communication Technology (ICT) firms, from a financial perspective. The causal relationship between capital structure and cost of capital is investigated in a simultaneous equation framework. On the one hand, we relate international diversification to the firm’s capital structure, and on the other, we test their individual and collective inferences on the combined debt and equity cost of capital. Even though ICT companies are subject to the same market forces as other firms, the rapid development of the industry, complexity of their technologies and presence of the network effect may have valuable implications in determining their financing patterns. Using information pertaining to ICT and non-ICT firms listed on the NASDAQ stock exchange, we expect a negative correlation between international diversification and higher total and long-term debt ratios, and a reduction in the overall cost of capital. Results suggest significant heterogeneity among ICT and non-ICT firms and within each group by a number of firm characteristics.

Keywords: International diversification; Capital structure; Cost of capital; Debt; ICT; NASDAQ

JEL-codes: C33; D21; G32

26 pages, April 25, 2006

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