Damodaran’s Country Risk Premium: A Serious Critique

20 Pages Posted: 31 Jul 2010 Last revised: 4 Aug 2010

Lutz Kruschwitz

Free University of Berlin (FUB) - Department of Business and Economics

Andreas Loeffler

Freie Universität Berlin

Gerwald Mandl

University of Graz

Date Written: July 31, 2010

Abstract

For several years, when setting discount rates Damodaran has advocated more consideration of country risk premiums (CRP) when it comes to assessing companies with activities in emerging markets. In this paper we want to perform a systematic analysis and critical discussion of his CRP concept. It will turn out that Damodaran’s concept of a country risk premium (CRP) is of no relevance in academic circles, has no theoretical basis neither is the CRP concept empirically supported. Furthermore, the rates of return on capital that are derived by such methods are highly arbitrary.

Keywords: Country Risk Premium, Valuation, Cost of Capital

JEL Classification: G31, G15, G11

Suggested Citation

Kruschwitz, Lutz and Loeffler, Andreas and Mandl, Gerwald, Damodaran’s Country Risk Premium: A Serious Critique (July 31, 2010). Available at SSRN: https://ssrn.com/abstract=1651466 or http://dx.doi.org/10.2139/ssrn.1651466

Lutz Kruschwitz (Contact Author)

Free University of Berlin (FUB) - Department of Business and Economics ( email )

Boltzmannstrasse 20
D-14195 Berlin, 14195
Germany
+49 30 838-54631 (Phone)
+49 30 838-54468 (Fax)

Andreas Loeffler

Freie Universität Berlin ( email )

Boltzmannstr. 20
Berlin, 14195
Germany

HOME PAGE: http://www.andreasloeffler.de

Gerwald Mandl

University of Graz ( email )

Universitaetsstrasse 15 / FE
A-8010 Graz, 8010
Austria

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