Company-Specific Risk Premiums: Update on the Scholarly Evidence
29 Pages Posted: 23 Mar 2011 Last revised: 28 May 2011
Date Written: March 20, 2011
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: Suggested Citation