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Comparison of Cost of Equity Models: New International Evidence

53 Pages Posted: 22 Aug 2017 Last revised: 8 Feb 2018

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: February 8, 2018

Abstract

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) the international CAPM (ICAPM) with two risk factors, the global market index and a wealth-weighted foreign currency index. Using improved 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

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 (February 8, 2018). 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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