Should Managers Estimate Cost of Equity Using a Two-Factor International CAPM?
Managerial Finance, 38 (8), 2012
33 Pages Posted: 7 Jul 2010 Last revised: 14 Nov 2012
Date Written: January 22, 2012
For a large sample of U.S. companies, we compare the cost of equity estimates of a two-factor international CAPM with those of the single-factor domestic CAPM and the single-factor global CAPM. Our purpose is to assess how much difference it makes for U.S. firms to use the two-factor ICAPM instead of a single-factor model. We find: 1) the cost of equity estimates of the two-factor ICAPM are reasonably close to those of either single-factor model for U.S. firms with low-to-moderate foreign exchange exposure; and 2) perhaps surprisingly, for U.S. firms with extreme foreign exchange exposure, the cost of equity estimates of the two-factor ICAPM tend to be very close to those of the domestic CAPM, and even closer than to those of the single-factor global CAPM.
Keywords: International CAPM, Global CAPM, Domestic CAPM, Cost of Equity, Currency Exposure
JEL Classification: F3, G1, G3
Suggested Citation: Suggested Citation