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

See all articles by Walter Dolde

Walter Dolde

University of Connecticut - Department of Finance

Carmelo Giaccotto

University of Connecticut - Department of Finance

Dev R. Mishra

University of Saskatchewan - Edwards School of Business

Thomas J. O'Brien

University of Connecticut - Department of Finance

Date Written: January 22, 2012

Abstract

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

Dolde, Walter and Giaccotto, Carmelo and Mishra, Dev R. and O'Brien, Thomas J., Should Managers Estimate Cost of Equity Using a Two-Factor International CAPM? (January 22, 2012). Managerial Finance, 38 (8), 2012. Available at SSRN: https://ssrn.com/abstract=1635838 or http://dx.doi.org/10.2139/ssrn.1635838

Walter Dolde

University of Connecticut - Department of Finance ( email )

School of Business
One Univesity Place
Stamford, CT 06901-2315
United States
203-301-0806 (Phone)

Carmelo Giaccotto

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
202-486-4360 (Phone)
202-486-0349 (Fax)

Dev R. Mishra

University of Saskatchewan - Edwards School of Business ( email )

Edwards School of Business
Saskatoon, Saskatchewan S7N 5A7
Canada
306-966-8457 (Phone)
306-966-2515 (Fax)

Thomas J. O'Brien (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-486-3041 (Phone)
860-486-0634 (Fax)

HOME PAGE: http://www.business.uconn.edu/staff.asp?id=57

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