Firm inflexibility and the implied cost of equity*

Using a large dataset of manufacturing firms from 65 countries, we examine whether and how firm inflexibility influences implied cost of equity over the period 1989-2018. We find that, on average, a firm with higher level of inflexibility have a higher implied cost of equity. These results are consistent with the view that investors perceive firms with higher levels of inflexibility as risky firms. Our findings are robust to alternative proxies for firm inflexibility and cost of equity capital. We also show that the effects of firm inflexibility on implied cost of equity are stronger for small firms and firms located in more-developed countries.