Foreign Exchange Exposure and Cost of Equity for US Companies: Local Versus Global CAPM

Abstract

For US firms with extreme foreign exchange (FX) exposure levels, we ask whether the single-factor global capital asset pricing model (CAPM) yields significantly different cost of equity estimates from the local CAPM. For a sample of US firms from 2000 to 2007, we find a clear and statistically significant relation between the differences of the two models’ cost of equity estimates and the firms’ FX exposure estimates. However, the economic significance is questionable, even for US firms with extreme FX exposure levels.