Country Risk – Cost of Equity Measurement: Methodologies and Implications
Corporate Finance, September 2017, 292 - 301, CF1247951
30 Pages Posted: 14 Feb 2018 Last revised: 2 Apr 2018
Date Written: August 1, 2017
Evaluating investments in international (and particularly in emerging) markets often leads to confusion and controversy among academics and practitioners. Various theories propose competing models, whereas practitioners build their own alternatives. Our study provides an assessment of the most widely used methods of assessing country risk and shows that practitioners should carefully choose their country risk model. Current models produce a wide range of cost of equity estimates that can considerably affect management decisions. Our case study of reference firms in emerging markets reveals considerable spreads in the models’ estimates of up to 25.6 percentage points for individual firms and 15.4 percentage points on average.
Keywords: Cost of capital, cost of equity, foreign investment, country risk
JEL Classification: G31, G32
Suggested Citation: Suggested Citation