The cost of debt and the cost of equity: A perverse effect of expansionary monetary policies

Expansionary monetary policies have led to large falls in risk-free but also risky bond yields in OECD countries. However, they have not driven down the required return on equity or therefore the cost of equity capital. The different reactions of interest rates and the return on equity to the expansionary monetary policies have very negative consequences: The weighted average cost of capital ( WACC ) has hardly fallen despite the expansionary monetary policies, which explains the muted positive effect on corporate investment; The most profitable operation for companies is to borrow to buy back their shares, which weakens their financial situation .