Capital Expenditures Structure, Cost of Capital and Shareholders' Wealth

Abstract

Financing with reasonable cost, correct usage of capital and preventing the creation of unused resources are the financial management’s most important tasks. Appropriate financing and correct investment in assets leads to sustainable growth in shareholders’ wealth. This study was carried out to investigate the relationship between the capital expenditures structure (CES) and the cost of capital with shareholders’ wealth. Using systematic sampling in a five years period, 186 companies, including the listed companies in Tehran Stock Exchange were selected. To analyze data, Partial Least Squares method of Structural Equation Modeling was used. The findings indicated that there is a significant positive relationship between the CES and shareholders’ wealth in total, but some components of the CES are not related to shareholders’ wealth and it is necessary to be studied carefully. Because, understanding the relationship between the CES and shareholders’ wealth is very important to maximize shareholders’ wealth and will be most effective in capital expenditures’ budgeting. Also, there is a significant inverse relationship between the cost of capital and shareholders’ wealth.