Foreign Exchange Exposure and Cost of Equity for US Companies: Local Versus Global CAPM

Journal of Applied Finance, Spring/Summer 2011, Volume 21, Issue 1, pp. 78-88

Posted: 8 Aug 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

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Abstract

For US firms with extreme foreign exchange (FX) exposure levels, we ask whether the single-factor global capital asset pricing model (CAPM) yields significantly different cost of equity estimates from the local CAPM. For a sample of US firms from 2000 to 2007, we find a clear and statistically significant relation between the differences of the two models’ cost of equity estimates and the firms’ FX exposure estimates. However, the economic significance is questionable, even for US firms with extreme FX exposure levels.

Keywords: Foreign Exchange, CAPM, cost of equity

Suggested Citation

Dolde, Walter and Giaccotto, Carmelo and Mishra, Dev R. and O'Brien, Thomas J., Foreign Exchange Exposure and Cost of Equity for US Companies: Local Versus Global CAPM. Journal of Applied Finance, Spring/Summer 2011, Volume 21, Issue 1, pp. 78-88. Available at SSRN: https://ssrn.com/abstract=2126401

Walter Dolde (Contact Author)

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

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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