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We argue that the CAPM may be a reasonable model for estimating the cost of capital for projects in spite of increasing empirical evidence in the literature against the CAPM based on stock returns. As McDonald and Siegel (1985) and Berk, Green and Naik (1999) point out, stocks are backed by...
Persistent link: https://www.econbiz.de/10013146788
Implied cost of capital has been a research method to measure ex-ante market risk premia using analysts' forecasts and observable share prices. Despite its theoretical appeal, commonly used firm level as well as portfolio level implied cost of capital methods reveal differing empirical results....
Persistent link: https://www.econbiz.de/10013089368
Persistent link: https://www.econbiz.de/10010503404
This study examines the build-up method in estimating the cost of capital for valuing small, closely held businesses. Cost of capital is the rate of return expected from an investment. The build-up method adds the risk-free rate, the equity risk premium, the firm size premium and...
Persistent link: https://www.econbiz.de/10013122944
Despite their popularity as proxies of expected returns, the implied cost of capital's (ICC) measurement error properties are relatively unknown. Through an in-depth analysis of a popular implementation of ICCs by Gebhardt, Lee, and Swaminathan (2001) (GLS), I show that ICC measurement errors...
Persistent link: https://www.econbiz.de/10009772282
This study uses the universe of US public firms to examine the impact of credit default swap (CDS) trading on a firm's cost of capital during the period 2001–2018. Our results robustly show that the inception of CDSs causes a significant reduction in a firm's weighted average cost of capital...
Persistent link: https://www.econbiz.de/10012838205
We examine whether CEO extraversion, an important personality trait associated with leadership, affects firms' expected cost of equity capital. We measure CEO extraversion using CEOs' speech patterns during the unscripted portion of conference calls. After controlling for several CEO and firm...
Persistent link: https://www.econbiz.de/10012849652
Using a large panel of UK public firms, we examine the relationship between the financial risk hedging and the cost of equity capital. We hypothesize that firms utilizing financial derivative instruments reduce the stock return volatility which is priced in investors’ expectations. While...
Persistent link: https://www.econbiz.de/10013305953
We test whether the country risk variable is a significant risk factor in several CAPM based models of expected equity returns in Argentina, Brazil, Mexico, South Africa, Russia, Turkey and Venezuela. We also test the usual assumption that country risk can be added with a coefficient value of...
Persistent link: https://www.econbiz.de/10011076705
This paper shows that (i) project valuation via disequilibrium NPV+CAPM contradicts valuation via arbitrage pricing, (ii) standard CAPM-minded decision makers may fail to profit from arbitrage opportunities, (iii) standard CAPM-based valuation violates value additivity. As a consequence, the...
Persistent link: https://www.econbiz.de/10005260104