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

See all articles by Magnus Pande Horn

Magnus Pande Horn

Karlsruhe Institute of Technology

Daniel Hoang

Karlsruhe Institute of Technology (KIT)

Heiko Emmel

DZ Bank AG

Sebastian Gatzer

Karlsruhe Institute of Technology (KIT)

Alexander D.F. Lahmann

Handelshochschule Leipzig (HHL)

Michael Schmidt

Deutsche Bank AG

Date Written: August 1, 2017

Abstract

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

Horn, Magnus Pande and Hoang, Daniel and Emmel, Heiko and Gatzer, Sebastian and Lahmann, Alexander D.F. and Schmidt, Michael, Country Risk – Cost of Equity Measurement: Methodologies and Implications (August 1, 2017). Corporate Finance, September 2017, 292 - 301, CF1247951, Available at SSRN: https://ssrn.com/abstract=3112934

Magnus Pande Horn

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

Daniel Hoang (Contact Author)

Karlsruhe Institute of Technology (KIT) ( email )

Karlsruhe
Germany

Heiko Emmel

DZ Bank AG ( email )

60265 Frankfurt am Main
Germany

Sebastian Gatzer

Karlsruhe Institute of Technology (KIT) ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

Alexander D.F. Lahmann

Handelshochschule Leipzig (HHL) ( email )

Jahnallee 59
Leipzig, 04109
Germany

Michael Schmidt

Deutsche Bank AG ( email )

Taunusanlage 12
Frankfurt, 60325
Germany
+496991084552 (Phone)

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