Comparison of Cost of Equity Models: New International Evidence

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