Evidence on Industry Cost of Equity Estimators

Given that prior research into industry cost of equity indicates that CAPM-derived estimates are no worse than estimates from more complex models, we investigate the bias of the standard CAPM approach for each industry separately, and examine the effectiveness of alternative beta estimators. We find that constant betas produce better estimates of cost of equity for particular industries (mostly either ‘defensive’ or ‘highrisk’ industries). The paper succeeds in offering a meaningful assessment of the empirical reality of the CAPM, as well as offering guidance concerning the appropriate practical application of the CAPM when estimating industry cost of equity.