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The cost of equity for private firms

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  • Abudy, Menachem
  • Benninga, Simon
  • Shust, Efrat

Abstract

The paper presents a method for calculating the cost of equity capital for the non-marketable securities of private firms and its difference from the cost of equity capital of an all else equal public firm (the private firm premium). The method is based on a theoretical framework that assumes the investor is undiversified due to her holdings in non-marketable securities. We implement the method for both unlevered and levered firms, and also consider the effect of taxes. The findings indicate that the private firm premium increases with the firm's asset risk, its leverage ratio, and the non-diversification of the private firm's owner, while taxes are negatively related to the private firm premium.

Suggested Citation

  • Abudy, Menachem & Benninga, Simon & Shust, Efrat, 2016. "The cost of equity for private firms," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 431-443.
    • Handle: RePEc:eee:corfin:v:37:y:2016:i:c:p:431-443
    DOI: 10.1016/j.jcorpfin.2016.01.014
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    References listed on IDEAS

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    2. Michael Ewens & Joan Farre-Mensa, 2022. "Private or Public Equity? The Evolving Entrepreneurial Finance Landscape," Annual Review of Financial Economics, Annual Reviews, vol. 14(1), pages 271-293, November.
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    4. Lucie Rudolfová, 2018. "The dependence of the costs of borrowed interest-bearing capital on the chosen financial variables [Závislost nákladů úročeného cizího kapitálu na vybraných finančních ukazatelích]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2018(4), pages 51-69.
    5. Rasa Kanapickiene & Greta Keliuotyte-Staniuleniene & Deimante Teresiene, 2021. "Disclosure of Non-Current Tangible Assets Information in Private Sector Entities Financial Statements: The Case of Lithuania," Economies, MDPI, vol. 9(2), pages 1-64, May.

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    More about this item

    Keywords

    Non-marketability; Non-diversification; Cost of capital; Private firm valuation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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