Munich Personal RePEc Archive

Some Thoughts on the External Finance Premium and the Cost of Internal Finance

Brissimis, Sophocles N. and Papafilis, Michalis and Vlassopoulos, Thomas (2018): Some Thoughts on the External Finance Premium and the Cost of Internal Finance.

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Abstract

We draw a conceptual distinction between the cost and the opportunity cost of internal finance, the latter being an integral part of the definition of the external finance premium in the literature. We come up with an operational definition of the cost of internal finance and calculate its differential with the cost of external finance. We further delve into the concept of the equilibrium real interest rate and measure it in terms of the cost of internal finance as the rate that would prevail in the long run after temporary shocks in the economy have died out.

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