Comparison of Cost of Equity Models: New International Evidence

Abstract

For individual stocks of 46 countries, this study investigates empirical differences in discount rate estimates between three risk-return models of interest to managers who perform discounted cash flow valuation analysis: (1) the traditional (local) CAPM; (2) the global CAPM (GCAPM), where the only risk factor is the global market index; and (3) an international CAPM (ICAPM) with two risk factors, the global market index and a wealth-weighted foreign currency index. The study finds that model choice makes a substantial difference for many, but not all, countries.