Comparison of Cost of Equity Models: New International Evidence
48 Pages Posted: 22 Aug 2017 Last revised: 14 Oct 2018
Date Written: October 14, 2018
For individual companies of 46 countries, this study investigates differences in 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. Using improved research methods, the study finds 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 estimates exceeds 70 basis points. (2) For firms in 39 countries, the average difference between the GCAPM and ICAPM cost of equity estimates 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