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Consilient Observer
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février 28, 2024

Cost of Capital and Capital Allocation: Investment in the Era of “Easy Money”

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février 28, 2024

Cost of Capital and Capital Allocation: Investment in the Era of “Easy Money”


Consilient Observer

Cost of Capital and Capital Allocation: Investment in the Era of “Easy Money”

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février 28, 2024

 
 
  • We examine the counterintuitive behavior of U.S. public companies in the recent regime of “easy money,” the period of below-average interest rates from 2009 to 2021.
  • Lower rates and ready access to capital would imply companies use more debt, hold less cash, invest more, and return less cash to shareholders.
  • While these low rates encouraged plenty of undisciplined behavior among investors and companies, the large U.S. public companies behaved in ways that were not consistent with what theory would suggest.
  • We emphasize how companies often use hurdle rates much higher than their cost of capital and that buybacks will contribute less to earnings per share growth than they did in the period of easy money given today’s valuation multiples and interest rates.
 
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