Managers’ Cost of Equity Capital Estimates: Empirical Evidence

33 Pages Posted: 25 Dec 2012 Last revised: 21 May 2016

See all articles by Stephannie Larocque

Stephannie Larocque

University of Notre Dame - Mendoza College of Business

Alastair Lawrence

London Business School / University of California, Berkeley

Kevin J. Veenstra

McMaster University - DeGroote School of Business

Date Written: May 17, 2016

Abstract

Using actual practice data from U.S. corporate treasury executives, we provide initial evidence of managers’ internal estimates of their firms’ cost of equity capital (COEC) and extrapolate managers’ estimation practices to the broader population of public firms. Our study provides insights into the assumptions managers use in applying the capital asset pricing model (CAPM), the model that managers generally use to estimate their firms’ COEC according to prior research. We show that COEC estimates based on managers’ surveyed estimation practices are positively correlated with realized returns only in the pre-survey period, suggesting that managers set their COEC estimates in a backward-looking manner. Moreover, managers’ estimates are most correlated with estimates reverse-engineered following Easton (2004) and Gode and Mohanram (2003).

Keywords: cost of capital, realized returns, CAPM, manager estimates

JEL Classification: M4, M40, G31

Suggested Citation

Larocque, Stephannie A. and Lawrence, Alastair and Veenstra, Kevin J., Managers’ Cost of Equity Capital Estimates: Empirical Evidence (May 17, 2016). Journal of Accounting, Auditing and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2193740 or http://dx.doi.org/10.2139/ssrn.2193740

Stephannie A. Larocque (Contact Author)

University of Notre Dame - Mendoza College of Business ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Alastair Lawrence

London Business School / University of California, Berkeley ( email )

Regent's Park
London
United Kingdom

HOME PAGE: http://Www.alastairlawrence.net

Kevin J. Veenstra

McMaster University - DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

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