Managers’ Cost of Equity Capital Estimates: Empirical Evidence
33 Pages Posted: 25 Dec 2012 Last revised: 21 May 2016
Date Written: May 17, 2016
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: Suggested Citation