Company-Specific Risk Premiums: Update on the Scholarly Evidence

29 Pages Posted: 23 Mar 2011 Last revised: 28 May 2011

See all articles by David C. Smith

David C. Smith

University of Virginia - McIntire School of Commerce

Brian Calvert

Development Specialists, Inc.

Date Written: March 20, 2011

Abstract

We provide a comprehensive and up-to-date synthesis of empirical studies examining company-specific risk premiums (CSRPs). We cover a number of new papers that have revived an academic debate as to whether or not company-specific risk is priced into the cost of capital. We show that the current evidence supports the original Fama and MacBeth (1973) finding that company-specific risk does not explain variation in cross-sectional stock returns and that holders of risky securities do not appear to receive compensation for bearing company-specific risk. Thus, the most recent empirical evidence does not support the assertions of some practitioners that the CSRP should be included in the cost of capital.

Keywords: idiosyncratic risk, company-specific risk, cost of capital, corporate valuation

JEL Classification: G12, G33

Suggested Citation

Smith, David Carl and Calvert, Brian, Company-Specific Risk Premiums: Update on the Scholarly Evidence (March 20, 2011). Available at SSRN: https://ssrn.com/abstract=1791213 or http://dx.doi.org/10.2139/ssrn.1791213

David Carl Smith (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

Brian Calvert

Development Specialists, Inc. ( email )

70 W. Madison St.
Chicago, IL 60602
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
359
Abstract Views
1,890
rank
82,533
PlumX Metrics