This paper's results are consistent with the choice of accounting method in the oil and gas industry being dominated by measurable characteristics of firms and guided by the principles of efficient contracting. The results are inconsistent with an alternative hypothesis, opportunistic behavior by managers. The efficient contracting explanation is also consistent with the empirical findings from earlier studies; [e.g., Lilien and Pastena (1982) and Deakin 1979)].

We examine the relationship between leverage (the assets-to-equity ratio) and the weighted-average cost of capital (WACC) for an unbalanced panel of U.S. bank holding companies (BHCs) over the period spanning 1996 through 2019. We assess the extent to which changes in capital requirements affect the WACCs of these institutions and find significant differences across three, mutually exclusive asset-size classes of BHCs. In particular, the WACCs of small and medium-sized BHCs are found to be more sensitive to changes in capital requirements than the WACCs of large BHCs. For a hypothetical doubling of Tier-1 capital, we find that the largest BHCs saw their WACCs increase by 42 basis points, while the WACCS of small and medium-sized BHCs are estimated to have increased by 62 and 76 basis points, respectively. We attribute differences between these results to differences in the strength and scope of government guarantees and in the composition of BHCs’ assets and liabilities as reported on their balance sheets.