Risk and Ex Ante Cost of Equity Estimates of Emerging Market Firms

Abstract

We examine the empirical relationship between estimates of ex ante cost of equity and risk for a sample of individual emerging market equities for the period 1990-2000. The ex ante cost of equity estimates are obtained using the residual income valuation model. As in studies that use mean realized returns on emerging market indexes, a measure of total risk (return volatility) is the most significant risk factor in explaining ex ante expected return estimates. For emerging market equities with substantial investability to global investors, global beta adds some explanatory power.