Abstract
The paper is organized in six chapters. For all interested readers chapter two contains a detailed explanation of the ABRM technique with numerical illustrations. For academic researchers in particular, chapter three provides a detailed discussion of the research methodology. For the corporate investment decision maker, financial analyst and financial researcher, chapter four provides a detailed review of the evidence that shows why the ABRM cost of capital differs from the CAPM. For the strategic manager and strategic management researcher, chapter five shows how ABRM can be used to integrate risk measures in the modelling of competitive advantage. Chapters four and five contain sub-sections dealing with the relevant academic literature. Conclusions and implications and areas for further development are discussed in chapter six. It is hoped that all the paper will benefit all these groups as well as the interested general financial and accounting reader and student. The development of new accounting techniques are rare and depend upon detailed engagement by the profession for their dissemination. All survey participants were provided with detailed feedback in the form of spreadsheet computations for their own organizations. As with any technique, there are practical limitations, in particular finding and estimating an appropriate benchmark, and forms of approximation and reasonable assumptions are required. For reasons suggested above it is important that the cost of capital is computed as accurately as possible. The evidence suggests that firms have higher variability of cost than might be assumed and are therefore less risky than implied by the CAPM. Equity capital might, for the typical firm, be cheaper, and the level of investment therefore greater than previously assumed. Similarly, the investment community may benefit if the diversifiable risk from portfolio investment is less than it might appear when using models derived from market data.
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