Industry Cost of Equity: A New Approach

32 Pages Posted: 18 Aug 2013

See all articles by Omar Gharaibeh

Omar Gharaibeh

Griffith University - Griffith Business School

Graham N. Bornholt

Griffith University - Department of Accounting, Finance and Economics

Michael J. Dempsey

Ton Duc Thang University (TDTU)

Date Written: August 18, 2013

Abstract

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.

Suggested Citation

Gharaibeh, Omar and Bornholt, Graham N. and Dempsey, Michael J., Industry Cost of Equity: A New Approach (August 18, 2013). Available at SSRN: https://ssrn.com/abstract=2311850 or http://dx.doi.org/10.2139/ssrn.2311850

Omar Gharaibeh

Griffith University - Griffith Business School ( email )

Brisbane, Queensland 4111
Australia

Graham N. Bornholt (Contact Author)

Griffith University - Department of Accounting, Finance and Economics ( email )

Gold Coast Campus
Gold Coast QLD, 4222
Australia

Michael J. Dempsey

Ton Duc Thang University (TDTU) ( email )

District 7
Ho Chi Minh City, 3001
Vietnam

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