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
Date Written: February 16, 2016
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: Suggested Citation