Morgan Stanley IM: Cost of Capital and Capital Allocation - Investment in the Era of “Easy Money”
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We examine the counterintuitive behavior of U.S. public companies in the recent regime of “easy money” marked by below-average interest rates.
29.02.2024 | 05:28 Uhr
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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