The cost of capital is one of the key determinants of corporate investment, and according to the q theory framework, it has a negative effect on investment. However, there has been relatively little research on the relation between the cost of capital and corporate investment. Frank and Shen (2016) report the following findings: (1) the cost of capital estimated by asset pricing models such as the CAPM have a positive effect on investment; and (2) the implied cost of capital is negatively related to investment. They provide considerable insight into methods for estimating the cost of equity, but do not give a convincing explanation for their unexpected results. Building on their insight, we use a dataset of listed Korean firms to estimate a firm's expected return using different measurement methods, and investigate whether the empirical result depends on how the cost of equity capital is measured. The most common approach to estimating a firm's cost of equity is to calculate the expected return based on the CAPM. The implied cost of equity derived from stock prices and analyst forecasts could be an alternative measure of the expected return for a firm's stock. In this study, we estimate the implied cost of equity by applying two different valuation models: the Gordon growth model and the abnormal earnings growth model developed by Ohlson and Juettner-Nauroth (2005). The sample dataset covers the 2002 to 2016 period. Following Frank and Shen (2016), we use a g-decomposed model in which investment is formulated as a function of marginal profitability and discount rate for a firm's capital budgeting decision. According to the model based on the q theory, investment should be negatively related to the weighted average cost of capital, which represents the discount rate. Our findings, however, show that the CAPM-based estimate does not confirm the validity of the theoretical prediction. We consider the effect of macroeconomic factor such as the business cycle on the association between the CAPM-based estimates and corporate investment, as it is possible that firms make different investment decisions at different stages of the business cycle. We divide our sample period into an expansion period and a contraction period, and conduct the same analysis on the subsamples. We find that the positive impact of the CAPM estimate is only significant in the expansion period. We also find that the positive effect is large for the subset of relatively small firms that are listed on the Kosdaq market. The implied cost of capital-based analysis produces different results. We find that the implied cost of capital is negatively linked to investment, perhaps because the implied cost of equity capital (i.e., the return required by shareholders) better reflects investors' expectations about the riskiness of firm-specific investments, and the information imbedded in the estimate can be useful for managers' capital budgeting decisions. Next, we focus on the internal capital market effect, which occurs in the Korean business group. Following previous studies, we assume that firms that belong to business groups have easier access to internal capital markets. To examine whether the internal capital market plays a significant role in firms' investment decisions, we categorize our sample firms into two subsamples: independent firms and group-affiliated firms. Our analyses of the subsamples suggest that the cost of capital can have different effects on firms' investment expenditures depending on their business group affiliation. More specifically, we find that the negative relation between the weighted average cost of capital and investment is statistically insignificant for group-affiliated firms, whereas for independent firms, we find that investment is negatively affected by the weighted average cost of capital. This evidence is consistent with the notion that the investments of group-affiliated firms with easier access to internal capital markets are less affected by external financing cost than independent firms. In a further analysis, we also find that the investment of group-affiliated firms is negatively correlated with the debt component of the WACC, but not with its equity component. This implies that the internal capital market relieves the financing constraints of firms belonging to business groups, but it does not completely substitute for the external capital market. Finally, we use the expected return estimated by the Fama–French three-factor model as a proxy for the cost of equity. We find that the FF3-based estimate has a negative effect on investment, but the effect is not statistically significant for the whole sample, suggesting that the factor loadings of the Fama-French model can measure firm-specific risk more accurately than the CAPM beta, but they are insufficient to represent the unsystematic risk that individual firms are likely to face with respect to their investment decisions.