Estimating Cost of Equity: Do You Need to Adjust for Foreign Exchange Risk?

Journal of International Financial Management and Accounting, February 2016

29 Pages Posted: 29 Sep 2013 Last revised: 16 Feb 2016

See all articles by Alain A. Krapl

Alain A. Krapl

Northern Kentucky University - Department of Economics and Finance

Thomas J. O'Brien

University of Connecticut - Department of Finance

Date Written: February 16, 2016

Abstract

Empirical reports of priced foreign exchange (FX) risk raise the question of whether managers should adjust their cost of equity estimates for FX risk. To study this question, we empirically compare the cost of equity estimates of several risk-return models, including some that have explicit FX risk premia and others that do not. We find that adjusting for FX risk makes little difference, on average, in the cost of equity estimates, even for small firms and firms with extreme FX exposure estimates.

Keywords: Foreign exchange, currency, cost of equity, CAPM, International CAPM

JEL Classification: F23, F65, G12, G15

Suggested Citation

Krapl, Alain A. and O'Brien, Thomas J., Estimating Cost of Equity: Do You Need to Adjust for Foreign Exchange Risk? (February 16, 2016). Journal of International Financial Management and Accounting, February 2016. Available at SSRN: https://ssrn.com/abstract=2332299 or http://dx.doi.org/10.2139/ssrn.2332299

Alain A. Krapl

Northern Kentucky University - Department of Economics and Finance ( email )

Haile/US Bank College of Business
Nunn Drive
Highland Heights, KY 41099
United States

Thomas J. O'Brien (Contact Author)

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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