The cost of capital for companies reflects the attitudes of investors toward risk—specifically, the reward they expect for taking risks. If they become more averse to risk, companies have difficulty raising capital and may need to cancel or defer some investments or to forgo some mergers and acquisitions. So it’s understandable that the current financial crisis has many executives concerned about what the price of risk—the cost of capital—will mean for their strategic decisions in the near term.
Yet our analysis finds no evidence that the long-term price of risk has increased over its historical levels—even though short-term capital is difficult to obtain. Anyone with a longer-term view won’t find this surprising. At the peak of the tech bubble of 2000, when the media were awash with suggestions that the cost of capital had permanently declined, a deeper analysis suggested that it was remarkably stable—and has been for the past 40 years.1
Obviously, for companies that are concerned about survival and having difficulty raising capital, its cost is clearly irrelevant. We realize some companies just don’t have access to new capital, period. Yet for companies that have more of it than they need to survive—either from internally generated funds...