Comparison of Cost of Equity Models: New International Evidence
55 Pages Posted: 22 Aug 2017 Last revised: 19 Jun 2018
Date Written: June 19, 2018
For individual companies of 46 countries, we empirically examine differences in cost of equity estimates of 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. Using improvements on prior research methods, we find that the model choice makes a substantial difference: (1) For firms in 33 countries, the average difference between the local CAPM and ICAPM cost of equity exceeds 70 basis points. (2) For firms in 39 countries, the average difference between the GCAPM and ICAPM cost of equity exceeds 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: Suggested Citation