Industry Cost of Equity Capital: UK Evidence

26 Pages Posted: 13 Oct 2009

See all articles by Alan Gregory

Alan Gregory

University of Exeter - Xfi Centre; University of Exeter Business School

Maria Michou

University of Edinburgh Business School

Date Written: 2009-02

Abstract

This paper explores the industry cost of equity capital for the UK. We replicate the Fama and French (1997) US analysis for UK industries, but additionally investigate the industry cost of equity capital obtained from a conditional CAPM, the Cahart (1997) four factor model, and the Al-Horani, Pope and Stark (2003) R&D model. In line with the Fama-French US results, the out of sample performance of all the models is disappointing Whilst the FF3F model has a somewhat higher explanatory power than the CAPM in terms of explaining past returns, the SMB and HML factor slopes show considerable variability through time. However, all our models of the cost of equity capital in the UK outperform a simple ‘beta one’ model, a result that has implications for the regulatory process. There is also some evidence to suggest that a conditional CAPM may be of interest to regulators. The new R&D model of Al-Horani et al. clearly has potential, in that over the limited period for which data is available it yields return errors not dissimilar to those found under the FF3F model, but exhibits slope coefficients on the fourth R&D factor that seem to be relatively stable.

Suggested Citation

Gregory, Alan and Michou, Maria, Industry Cost of Equity Capital: UK Evidence (2009-02). Journal of Business Finance & Accounting, Vol. 36, Issue 5-6, pp. 679-704, June/July 2009, Available at SSRN: https://ssrn.com/abstract=1486370 or http://dx.doi.org/10.1111/j.1468-5957.2009.02135.x

Alan Gregory

University of Exeter - Xfi Centre ( email )

University of Exeter
Xfi Building, Rennes Dr.
Exeter, EX4 3BZ
United Kingdom

University of Exeter Business School ( email )

Streatham Court
Xfi Building Rennes Dr.
Exeter, EX4 4JH
United Kingdom

Maria Michou

University of Edinburgh Business School ( email )

William Robertson Building
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
United Kingdom
0131 650 8341 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
2
Abstract Views
833
PlumX Metrics