The Causal Relationship between Capital Structure and Cost of Capital: Evidence from ICT Companies Listed at NASDAQ

Dany Aoun () and Almas Heshmati
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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,

No 87, Ratio Working Papers from The Ratio Institute

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 (search for similar items in EconPapers)
JEL-codes: C33 D21 G32 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2006-04-25
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-ino
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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