The Dynamic Market-Derived Capital Pricing Model: Theoretical Foundations and Empirical Analysis
University of Quebec at Rimouski - Department of Management Sciences
May 1, 2014
In this paper we propose a dynamic version of the Market-Derived Capital Pricing Model (MCPM) of McNulty, Yeh, Schulze and Lubatkin (2002). By introducing the competitive advantage period “CAP” in the algorithm of this model, we develop the Dynamic Market-Derived Capital Pricing Model (DMCPM). The economic theoretical foundation of the DMCPM is based on the competitive economic equilibrium concept. A sample of 80 U.S. firms and cross section data are used in the empirical analysis. We compare the cost of capital estimation results from the DMCPM with those from the CAPM. Also, we test the explanatory power of the marginal return to cost of capital ratio from the DMCPM compared to that from the CAPM. The results of difference tests, Cox tests and J tests of Davidson and MacKinnon (1981) show the relevance of the estimated cost of capital from the DMCPM.
Keywords: cost of equity, cost of captal, capital asset pricing model
JEL Classification: G12, G30, C52
Date posted: May 3, 2014 ; Last revised: December 2, 2015