The Relationship between Cost of Capital and Financial Information Using Bayesian Network

The capital is an essential element to run a company normally. The cost to operate a capital is called the cost of capital. The cost of capital is closely related to a capital structure, governance structure, and investment decisions of a company so it is a critical element for an manager to manage the cost of capital appropriately. This study analyzed the cost of capital and the financial information of the company affecting it using the Bayesian Network. This study utilized Markov Blanket, a set of minimum financial information affecting the cost of capital, in order to achieve study objectives. Additionally, a sensitivity analysis, reflecting the complex real world, was conducted based on the causal relationships derived from this. Previous studies on the cost of capital assumed that dependent variables and independent variables had linear relationships. However, this assumption has a limitation that it does not reflect the various phenomena in the real world. Therefore, this study considered the interdependence between variables using General Bayesian Network and examined how each variable affected the cost of capital.
The results of this paper will be useful for accounting information users and supervisory agencies. In other words, the results of this study will provide background information for shareholders, creditors, and manager, who make decisions using the cost of capital, to make rational decisions. Moreover, the obtained results will help supervisory agencies to improve related regulations by providing necessary information regarding financial characteristics influencing the cost of capital.