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Evidence on Industry Cost of Equity Estimators

Author

Listed:
  • Omar Gharaibeh
  • Graham Bornholt
  • Michael Dempsey

Abstract

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.

Suggested Citation

  • Omar Gharaibeh & Graham Bornholt & Michael Dempsey, 2014. "Evidence on Industry Cost of Equity Estimators," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 8(4), pages 1-15.
    • Handle: RePEc:ibf:ijbfre:v:8:y:2014:i:4:p:1-15
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Cost of Equity; Defensive Industries; Constant Beta;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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