Previous research shows that the implied cost of capital (factor model-based estimates for the cost of equity) have a negative (positive) effect on investment. Our paper documents that these alternative cost-of-equity proxies also have opposite effects on external financing activities. We show that the ICC has negative effects on investment and external financing by capturing the firm-specific discount rate news, whereas the factor model-based proxies have positive effects by capturing the cash flow news. Furthermore, the negative effects of the ICC are more pronounced for firms with high private information and equity dependence, whereas the positive effects of the factor model-based estimates are more pronounced for firms with low private information and equity dependence. Thus, the opposite effects of the cost-of-equity proxies can be explained by their distinctive information contents. 

JEL Classification: G31; G32
Keywords: Implied Cost of Capital; Cash Flow News; Discount Rate News​