Estimating the Cost of Equity and Equity Risk-Premia of Canadian Firms

26 Pages Posted: 18 Jul 2015

See all articles by George Athanassakos

George Athanassakos

University of Western Ontario - Finance-Economics Area Group

Date Written: 1997

Abstract

This article proposes an alternative approach to estimating the required rate of return on equity, combining the bond-plus risk-premium approach and the Capital Asset Pricing Model, and tests it using Canadian data. Individual stock risk-premia are classified into groups according to the point in the business cycle, risk based on each company’s bond rating, and industry groups as defined by industry classification. Group averages are calculated. We find equity risk-premia are negatively related to interest rates and bond ratings. Moreover, the higher the risk of an industry group, the higher are the equity risk-premia. However, findings regarding the risk-premia’s sensitivity to the business cycle and stability across business cycles are not very conclusive.

Keywords: equity risk-premia; cost of equity; CAPM; bond-plus risk-premium

JEL Classification: G31, G12

Suggested Citation

Athanassakos, George, Estimating the Cost of Equity and Equity Risk-Premia of Canadian Firms (1997). Multinational Finance Journal, Vol. 1, No. 3, p. 229-254, 1997, Available at SSRN: https://ssrn.com/abstract=2631561

George Athanassakos (Contact Author)

University of Western Ontario - Finance-Economics Area Group ( email )

London, Ontario N6A 5B8
Canada

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