Global Risk Factors and the Cost of Capital

Abstract

Analysis of 3,300 stocks from nine industrialized countries over the 1980–99 period indicates that whether the capital asset pricing model or some form of international CAPM is used makes little difference in the cost-of-capital estimate for most companies in most countries. The international CAPM yielded an estimate of the cost of equity capital that was significantly different from that of the domestic CAPM in only 4–5 percent of the sample companies. For the vast majority of companies, the domestic market factor is an adequate benchmark against which to measure an individual company's exposure to both global market and currency risk factors.