Cash flow risk and the implied cost of equity capital

This study examines the effect of cash flow risk on the implied cost of equity capital. Empirical results indicate that firms with higher levels of cash flow risk are associated with more expensive equity financing. This positive relationship holds firmly after addressing potential endogeneity and is robust to alternative measures of cash flow risk and the implied cost of equity capital. Moreover, under the influence of firm quality, the positive relationship is more pronounced for firms with younger age and smaller size.