Industry Cost of Equity: A New Approach
32 Pages Posted: 18 Aug 2013
Date Written: August 18, 2013
Given that prior research into industry cost of equity indicates that CAPM-derived estimates are no worse than those from more complex models, we investigate the bias of the standard CAPM approach for each industry separately, and examine the effectiveness of alternative beta estimators. We find that constant betas produce better estimates of cost of equity for particular industries (mostly either ‘defensive’ or ‘high-risk’ industries). The paper succeeds in offering a meaningful assessment of the empirical reality of the CAPM, as well as offering guidance concerning the appropriate practical application of the CAPM when estimating industry cost of equity.
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