Organizational Inertia and Cost of Equity Capital

Organizational inertia as a defensive mechanism has pervasive effects on the functional aspects of organizations, including financial functions. One of these financial aspects affected by inertia is the cost of equity capital. Hence, This article aims to contribute to the accounting knowledge literature by presenting the framework of organizational inertia (OI) and investigating the effect of the cost of equity capital (COE) on it. This article uses meta-synthesis, the Delphi process, and, finally, questionnaire design to measure organizational inertia. The mentioned questionnaire was sent to the managers of the sample companies, and finally, 138 questionnaires were completed and returned and included in the statistical analysis. To measure the cost of equity capital, we use three proxies, including the O’Hanlon and Steele (2000) Model (OSM), CAPM, and Industry-Adjusted Earnings-to-Stock Price Ratio (IndEP). The results show that organizational inertia has a positive and significant effect on the cost of equity capital. The research results have confirmed that organizational inertia has a positive and significant effect on the cost of equity capital. This means that the increase in structural resistance causes the company’s financing costs to increase, and the company faces more challenges in obtaining resources.