Abstract
This study examines how the implied cost of capital(ICC) effects a firm's financing and investment decisions. We find that firms with lower ICC rely more on equity financing and undertake larger mergers and acquisitions. These findings indicate that ICC captures both equity mispricing and a firm's ability to generate value from investment opportunities. Further, we discover that M&A transactions involving low-ICC bidders generate higher shareholder value, highlighting their ability to capitalize on growth opportunities. We determine that alternative measures of the cost of equity fail to replicate these results, underscoring the relevance of ICC in M&A research.