Comparison of Cost of Equity Models: New International Evidence

39 Pages Posted: 22 Aug 2017 Last revised: 15 Jan 2019

See all articles by Demissew Diro Ejara

Demissew Diro Ejara

University of New Haven

Alain A. Krapl

Northern Kentucky University - Department of Economics and Finance

Thomas J. O'Brien

University of Connecticut - Department of Finance

Santiago Ruiz de Vargas

NOERR AG WPG StBG - Advisory Services

Date Written: January 15, 2019

Abstract

For individual companies of 46 countries, this study investigates differences in local-currency cost of equity estimates between three risk-return models of interest to practitioners: (1) the traditional (local) CAPM; (2) the global CAPM (GCAPM), where the only risk factor is the global market index; and (3) an international CAPM (ICAPM) with two risk factors, the global market index and a wealth-weighted foreign currency index. The study finds that model choice makes a substantial difference for many, but not all, countries: (1) For 33 countries, we the average difference between firms’ local CAPM and ICAPM cost of equity estimates is over 70 basis points. (2) For 39 countries, the average difference between firms’ GCAPM and ICAPM estimates is over 40 basis points.

Keywords: International CAPM, Global CAPM, Local CAPM, Cost of Equity, Risk Premium, Currency Index, Beta; FX Exposure

JEL Classification: G15

Suggested Citation

Ejara, Demissew Diro and Krapl, Alain A. and O'Brien, Thomas J. and Ruiz de Vargas, Santiago, Comparison of Cost of Equity Models: New International Evidence (January 15, 2019). University of Connecticut School of Business Research Paper No. 18-04. Available at SSRN: https://ssrn.com/abstract=3023501 or http://dx.doi.org/10.2139/ssrn.3023501

Demissew Diro Ejara

University of New Haven ( email )

300 Boston Post Road
Department of Finance
West Haven, CT 06516
United States
(203) 932-7150 (Phone)

Alain A. Krapl

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 (Contact Author)

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

Santiago Ruiz de Vargas

NOERR AG WPG StBG - Advisory Services ( email )

Brienner Str. 28
Munich, Bavaria 80333
Germany
+4989286280 (Phone)

HOME PAGE: http://www.noerr.com

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