The Cost of Equity: Evidence from Investment Banking Valuations

55 Pages Posted: 15 Nov 2022 Last revised: 7 Aug 2023

See all articles by Gregory W. Eaton

Gregory W. Eaton

University of Georgia

Feng Guo

Iowa State University - Department of Accounting and Finance

Tingting Liu

Iowa State University ; European Corporate Governance Institute (ECGI)

Danni Tu

Southern Illinois University at Carbondale

Date Written: August 7, 2023

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, including industry, beta, size, and illiquidity. Other firm characteristics are unrelated to COE estimates or provide relations contradicting academic evidence. Bank-estimated COE is positively related to COE disclosed by the firms, but this relation is largely explained by firm characteristics. Banks use significantly higher COE values in management buyouts, which potentially underestimates target value, making the bid more attractive for target shareholder approval.

Suggested Citation

Eaton, Gregory W. and Guo, Feng and Liu, Tingting and Tu, Danni, The Cost of Equity: Evidence from Investment Banking Valuations (August 7, 2023). Available at SSRN: https://ssrn.com/abstract=4266522 or http://dx.doi.org/10.2139/ssrn.4266522

Gregory W. Eaton (Contact Author)

University of Georgia ( email )

Department of Finance
Athens, GA 30602-6254
United States

Feng Guo

Iowa State University - Department of Accounting and Finance ( email )

College of Business
Ames, IA 50011-2063
United States

Tingting Liu

Iowa State University ( email )

2330 Gerdin Business Building
Ames, IA 50011
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Danni Tu

Southern Illinois University at Carbondale ( email )

Rehn Hall - Mail Code 4626
Carbondale, IL Illinois 62901-4515
United States

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