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

21 Pages Posted: 6 Jan 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 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.

Suggested Citation

Krapl, Alain A. and O'Brien, Thomas J., Estimating Cost of Equity: Do You Need to Adjust for Foreign Exchange Risk? (February 2016). Journal of International Financial Management & Accounting, Vol. 27, Issue 1, pp. 5-25, 2016. Available at SSRN: https://ssrn.com/abstract=2711488 or http://dx.doi.org/10.1111/jifm.12031

Alain A. Krapl (Contact Author)

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

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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