The cost of equity: Evidence from investment banking valuations
66 Pages Posted: 15 Nov 2022 Last revised: 16 Mar 2025
Date Written: November 01, 2024
Abstract
Using manually compiled cost of equity (COE) estimates disclosed in takeover regulatory filings, we provide novel evidence on how finance professionals, i.e., investment bankers, estimate discount rates. COE estimates are related to several risk proxies, such as beta and size. Other firm characteristics are unrelated to COE estimates or provide relations contradicting academic evidence. We also explore the role of incentives. For example, banks use significantly higher COEs in management buyouts, which potentially underestimates target value, making the bid more attractive for target shareholder approval.
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