The cost of equity: Evidence from investment banking valuations

66 Pages Posted: 15 Nov 2022 Last revised: 1 Nov 2024

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

The University of Tennessee, Knoxville; European Corporate Governance Institute (ECGI)

Danni Tu

Southern Illinois University at Carbondale

Date Written: July 03, 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. Bank-estimated COE is positively related to COE disclosed by firm management, though the two are distinct. We explore the role of incentives; banks use significantly higher COEs 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 (July 03, 2024). 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

The University of Tennessee, Knoxville ( email )

TN

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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