Equity Estimates Research Articles

The Predictive Performance of Asset Pricing Models: Evidence from the Australian Securities Exchange

This paper considers the accuracy (or otherwise) of cost of equity estimates provided by a range of Australian asset pricing models on industry returns. The results suggest that a simple, constant-benchmark approach (fixed excess return of five percent per annum) provides the best forecast for the cost of equity capital for the various industry segments of the Australian Securities Exchange examined across the observation window. Our results from Australia corroborate U.S. findings regarding the disconnect between asset pricing models that provide the best ex-post explanation of asset returns and models that produce superior ex-ante predictions of the cost of capital.

A New Measure of Equity and Cash Flow Duration: The Duration‐Based Explanation of the Value Premium Revisited

This article reexamines the duration‐based explanation of the value premium using novel estimates of the firms' equity and cash flow durations based on analyst forecasts. We show that the value premium can be explained by cross‐sectional differences in the shares' equity durations, but not by their cash flow durations. Different from the duration‐based explanation of the value premium that explains the value premium with cross‐sectional differences in the firm's cash flow timing, we find that short‐horizon stocks have lower (expected) returns than long‐horizon stocks. This result is consistent with an upward‐sloping equity yield curve.

PRAGMATICS OF USING A MODIFIED CAPM MODEL FOR ESTIMATING COST OF EQUITY ON EMERGING MARKETS

The aim of the work is to forming pragmatic recommendations for the development and implementation the modified CAPM model in the process of estimating the equity value on emerging markets. Original CAPM model allows estimating the cost of equity on the developed capital markets. At the same time it requires the information received on the market data basis. But, as show recent empirical research, the classical model does not always produce acceptable results of the equity estimation. In addition, CAPM model in its classical form can’t be used to estimate the cost of equity for countries with emerging markets. This is due with lower efficiency in emerging markets, with lower level of liquidity and capitalization, which makes the information obtained from these markets not entirely reliable. Therefore in practice are increasingly using different modification CAPM models, that allow consider for more specific factors which affect the cost of equity. These factors, which are not considered in the classical CAPM model, include the size of the corporation and country risk. The first factor is actual for developed and emerging markets and needed to account during the equity estimation and modification the CAPM model. Country risk is associated with differences and peculiarities of the economies different countries and in the first place should be taken into account when estimating the cost of equity in emerging capital markets, which are considered by investors as more risky for investment. This factor should also be taken into account in estimating the cost of equity. Methodology In the process of constructing a modified CAPM model, theoretical and methodological provisions were used, which are set out in the work R. Banz, G. Bekaert, M. Goedhart, R. Grabowski, R. Grinold, D. Vessels, A. Damodaran, M. Dempsey, J. Zhang, R. Ibbotson, P. Kaplan, T. Koller, K. Kroner, L. Kruschwitz, M. Long, A. Lofler, G. Mandl, M. Miller, F. Modilyani, K. Nunes, D. Peterson, S. Pratt, L. Siegel, Y. Fama, P. Fernandes, K. Harvey, D. Harrington, S. Hassett. Results In result of research received a modified CAPM model, which can be used to determine the cost of equity in developed and emerging capital markets. Practical implications Received model in result of research may have practical use in the process of estimating the equity value and designed to determine the rate of return required by investors for investing money in equity of corporations on emerging markets. Value/originality Described modified CAPM model takes into account the effect of a greater number of factors that determine the cost of capital on emerging markets and ensures a correct estimate of the equity value in absences of reliable information from emerging markets.

Industry cost of equity capital: European evidence for multifactor models

We estimate the costs of equity capital for 117 industries from 16 European countries employing the CAPM and 8 multifactor asset pricing models as well as a variety of different econometric techniques. In doing so, we extend previous research on cost of equity estimation in mainly two ways. First, our study involves European instead of US or UK industries, which are investigated in previous research, and we find that cost of equity estimates obtained from the CAPM or multifactor asset pricing models are as imprecise for European industries as for US and UK industries. Second, in addition to the CAPM, the Fama and French [1993. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics 33: 3–56] three-factor model, and the Carhart [1997. “On Persistence in Mutual Fund Performance.” The Journal of Finance 52 (1): 57–82] four-factor model, which are usually employed, our study includes six multifactor models that have not yet been examined on their ability to provide precise estimates of the costs of equity: the five-factor model of Fama and French [1993. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics 33: 3–56] as well as the multifactor models of Pástor and Stambaugh [2003. “Liquidity Risk and Expected Stock Returns.” Journal of Political Economy 111 (3): 642–685]; Campbell and Vuolteenaho [2004. “Bad Beta, Good Beta.” American Economic Review 94 (5): 1249–1275]; Hahn and Lee [2006. “Yield Spreads as Alternative Risk Factors for Size and Book-To-Market.” Journal of Financial & Quantitative Analysis 41 (2): 245–269]; Petkova [2006. “Do the Fama–French Factors Proxy for Innovations in Predictive Variables?” The Journal of Finance 61 (2): 581–612]; and Koijen, Lustig, and van Nieuwerburgh [2010. “The Cross-Section and Time-Series of Stock and Bond Returns.” Working Paper, University of Chicago, University of California at Los Angeles, New York University]. Our results suggest that these models provide even more imprecise cost of equity estimates. One main reason for these inaccurate estimates is the large temporal variation of the risk loadings on the non-traded factors in these models.

Facets of country image and brand equity: Revisiting the role of product categories in country‐of‐origin effect research

AbstractThe country‐of‐origin effect is a topic central to the field of international marketing. Country of origin has been found to exert a particularly potent effect on consumer evaluation in situations where there is a strong link between a country and a particular product category. The present study provides further insight into how this particular effect can be understood. Drawing on a novel conceptualization of how country image and product categories interact, this study tested the relative evaluative relevance of product category with respect to estimates of brand equity across a variety of product categories. The findings suggest that facets of a country's image that are more closely related to the evaluation situation exert a greater influence on the evaluation of brands. This result encourages scholars as well as practitioners to re‐evaluate which situations might cause the country of origin effect to hold managerial relevance and paves the way for new paths toward a more comprehensive understanding of the effect. Copyright © 2015 John Wiley & Sons, Ltd.

The Cross Section of Long-Term Expected Returns

Effective capital budgeting decisions require reliable estimates of long-term expected returns. I extract a predictor for long-term returns from the book-to-market ratio by controlling for its variation associated with long-term expected profitability. The resulting predictor reliably describes the cross section of returns out-of-sample for at least five years, even when focusing exclusively on large-cap stocks and controlling for expected-return estimates generated by implied cost of capital models, factor models, and characteristic-based models. My results have important implications for improving our cost of equity estimates.

Estimating Cost of Equity: Do You Need to Adjust for Foreign Exchange Risk?

Empirical reports of priced foreign exchange (FX) risk raise the question of whether managers should adjust their cost of equity estimates for FX risk. To study this question, we empirically compare the cost of equity estimates of several risk–return models, including some that have explicit FX risk premia and others that do not. We find that adjusting for FX risk makes little difference, on average, in the cost of equity estimates, even for small firms and firms with extreme FX exposure estimates.

The cost of equity estimation in emerging Europe: the case of Bulgarian REITs

Purpose– The International Valuations Standards Committee adopts the Capital Asset Pricing Model as a method for estimation of the cost of equity. It has several drawbacks and appraisers in emerging markets need more useful model for cost of equity estimation. The paper aims to discuss these issues.Design/methodology/approach– The proposed model is a modification of the Salomon Smith Barney model for cost of capital determination. The econometric part of the model incorporates the non-synchronous effect, the thin trading effect, the time varying risk nature, and the systematic country risk.Findings– The model estimates the cost of equity of Bulgarian REITs more accurate than the one, who uses the traditionalβestimation.Practical implications– The study provides appraisers, business consultants, and investment bankers with a consistent model for cost of equity estimation. The model incorporates most of the features of emerging markets REITs return series and avoids the weaknesses of the single-factor model for cost of equity estimation in emerging markets.Originality/value– The proposed model reflects the following characteristics: the degree of diversification of the particular investor (imperfectly diversified); country risk; and time-varying risk nature. The political risk is incorporated by more objective measure of the systematic country risk.

Cost of Equity Estimation in REIT Valuation in Emerging Europe: The Case of Bulgaria

We propose a model, which is a modification of the Salomon Smith Barney model for cost of capital determination. The model reflects the following characteristics: (1) the degree of diversification of the particular investor (imperfectly diversified); (2) the systematic country risk; (3) firm specific risks; and (4) time varying risk nature. The inputs of the model have as a source only publicly available data. An illustration of the proposed model is the case of U.S. investor who considers an investment in the most traded Bulgarian REITs.

Options for sustainable development planning based on “GHGs emissions reduction allocation (GERA)” from a national perspective

Climate change phenomenon can be seen as a simple but daunting problem. The lack of equity in emission reduction burden sharing regime, will cause a need for a greater sacrifice for poor or less developed countries. Thus, the evaluation of different aspects of equity at a national scale and presenting a top–down model of equity for allocation of GHGs emission (such as GERA) in line with sustainable development is the main objective of this study. In this study, the five equity principles proposed in the literature namely (1) population distribution, (2) GHGs emissions, (3) GDP, (4) trend of economic growth and (5) per capita of carbon productivity as appropriate criteria of equity estimation. Due to the different decision makers' preferences, different weights are allocated to indicators and analyzed. Iran has been considered as a case study, and these criteria were applied at national level to propose an allowance allocation scheme. The result of applying GERA for Iran, at provincial level and under the five equity criteria, determines which provinces have to shoulder higher reduction burdens, and makes a room for less developed provinces for growth. Based on these results, this model demonstrated to be more sensitive to criteria selection rather than to the weight factors. In addition, shifting to low carbon technologies or renewables, careful evaluation of current emission–income pattern, improving of energy intensity and finally, adjustment of secondary industries (manufacturing) based on ecological and natural resources of each region are suggested as the most efficient approaches toward sustainability and green development for the case study.

Size and Liquidity Effects in Nigeria: An Industrial Sector Study

This study estimates liquidity premiums using the recently developed Liu (2006) measure within a multifactor capital asset pricing model (CAPM) including size premiums and a time varying parameter model for the West African emerging market of Nigeria. The evidence suggests that liquidity factors are relevant only for financial and basic materials sector stocks while size factor is more generally relevant in explaining the cross section of stock returns in the Nigerian domestic equity market. Costs of equity estimates are high further underlining the limitations of this market as a capital-raising venue in contrast to the dominant banking sector.

A New Measure of Equity Duration: The Duration-Based Explanation of the Value Premium Revisited

This paper re-examines the duration-based explanation of the value premium using novel estimates of the firms' equity and cash flow durations based on analyst forecasts. We show that the value premium can be explained by cross-sectional differences in the shares' equity durations, but not by their cash flow durations. Different from the duration-based explanation of the value premium that explains the value premium with cross-sectional differences in the firm's cash flow timing, we find that short-horizon stocks have lower (expected) returns than long-horizon stocks. This result is consistent with an upward-sloping equity yield curve.

A measure of equity for public transit connectivity

An equitable transit system can cater to the needs of captive riders and maximize transit service coverage. Historically transit equity has not considered in planning or has been an afterthought in the process; leading to the underutilization of transit and encouraging travelers to be auto dependent. In this paper, the authors propose a methodology to estimate transit equity using a number of attributes such as frequency, speed, capacity, and built environment in a multi-modal transit network. We propose a methodology to measure transit equity from a graph theoretical approach for all levels of transit service coverage integrating routes, schedules, socio-economic, demographic and spatial activity patterns.The objective of using equity is to quantify and evaluate transit service in terms of prioritizing transit locations for funding; conforming with federal regulations; providing service delivery strategies, especially for areas with large multi-jurisdictional, multi-modal transit networks; providing an indicator of multi-level transit capacity for planning purposes and assessing the effectiveness and efficiency for node/stop prioritization while choosing transit as a mode of travel. The methodology uses a stylized connectivity measure with a Gini index for equity estimation at different levels such as stop, line, zone and area. An example problem is presented to demonstrate the proposed methodology. The approach is then applied to the Washington–Baltimore region in the United States. The results show the existing transit service coverage at different locations. The proposed approach can be utilized as a tool for transit service planning.

Do Anomalies Exist Ex Ante?

The anomalies literature in capital markets research in finance and accounting is based (almost) exclusively on average realized returns. In contrast, we construct accounting- based expected returns for dollar-neutral long-short trading strategies formed on a wide array of anomaly variables, including book to market, size, composite issuance, net stock issues, abnormal investment, asset growth, investment to assets, accruals, earnings surprises, failure probability, return on assets, and short-term prior returns. Our findings are striking. Except for the value and the size premiums, the cost of equity estimates differ drastically from the average realized returns.

Estimating and testing beta pricing models on industries

This paper uses the betas of book-to-market portfolios as proxies for systematic risks of industries instead of the individual betas computed from individual time-series regressions. Our empirical specification improves both the precision of the beta estimates and the cost of equity estimates. Estimating and testing beta pricing models via the proposed method highlights that consumption growth, liquidity risk, market excess returns, and the value factor explain the cross-sectional differences in expected industry returns, while there are no significant risk factors using the traditional approach. The fact that consumption risk is priced with monthly data is an interesting result, as the financial literature has struggled to prove that the consumption capital asset pricing model explains monthly returns.

Removing predictable analyst forecast errors to improve implied cost of equity estimates

Prior research documents a weak association between the implied cost of equity inferred from analyst forecasts and realized returns. It points to predictable errors in analyst forecasts as a possible cause. We show that removing predictable errors from analyst forecasts leads to a much stronger association between implied cost of equity estimates obtained from adjusted forecasts and realized returns after controlling for cash flow news and discount rate news. An estimate of implied risk premium based on the average of four commonly used methods after making adjustments for predictable errors exhibits strong correlations with future realized returns as well as the lowest measurement error. Overall, our results confirm the validity of implied cost of equity estimates as measures of expected returns. Future research using implied cost of equity should remove predictable errors from implied cost of capital estimates and then average across multiple metrics.

An Asymmetric Approach to the Cost of Equity Estimation: Empirical Evidence from Russia

The choice of an appropriate model for the estimation of the cost of equity in emerging markets is still a very challenging problem. Market inefficiency, limited opportunities for diversification, as well as liquidity issues inspire researches to look for risk characteristics beyond the traditional framework of the classical capital asset pricing model. Various models have been developed over the past several decades proposing new ways of risk assessment. However, the empirical evidence of these models requires careful consideration.Most asset pricing models were developed in terms of either a symmetric mean-variance or a folded mean-semivariance framework. These models have several drawbacks in capturing investors’ attitudes to stock price movements. We provide a brief description of the recently proposed entropic risk characteristics which assign greater weight to the downside movements of asset prices and smaller weight to the upside movements.The goal of this study is to determine which model has better explanatory power for returns in the Russian capital market. We compare the performance of risk measures in the Russian stock market on a dataset of 63 stocks for the period from 2003 to 2012. Empirical results show certain advantages of entropic risk characteristics over other risk measures in explaining returns on Russian equities.

Answering the question: are we making a difference?

Performance-based payment schemes are nothing new for not-for-profit organizations that use commercial business models, such as social marketing and social franchise programs. Perhaps because of their familiarity with using output-based budgeting processes, these programs have advanced the development of different types of modeling techniques for describing impacts on health outcomes, and applied these estimates to monitor programs worldwide. Tried and true estimates of health status have been used in new ways, and innovative estimates of equity are reported. Each of these developments is discussed in this special supplement, and each has something to say about the metrics that are used, and the usefulness of the results they produce. The disability-adjusted life year metric (DALY) is a wellknown measure of a population’s disease burden, most commonly known for its use in estimating the global burden of disease. The construction of the DALY statistic has not been without controversy, particularly the relative valuation of some interventions over others and the specification of the weights that are assigned for the measurement of health losses. The Global Burden of Disease Study 2010 provided fresh re-estimations of these weights using large-scale, population-based data sources, representing a major advancement with the DALY metric [1,2]. The variation of the DALY metric to suggest the effectiveness of programs, the DALYs averted metric, is an attractive theoretical premise that several of the papers in this special supplement explore. Through the use of large-scale program performance data across multiple countries, these papers carefully develop original applications of the DALYs averted metric, tracking impact of a single program, and comparing programs across widely different settings. In the process, several interesting issues arise that are surely causing conundrums for managers. For example, the shift from counting the number of products sold to estimating health impact showed that it is the level of disease prevalence (and mortality rates) that will drive the DALYs averted count; smaller programs in high disease burden settings have a larger impact in terms of DALYs averted than large programs in settings with low disease prevalence [3,4]. There are a number of conceptual leaps made in the models being reported, particularly as they move from using products and service utilization statistics to estimating the numbers of DALYs averted based upon the predicted impact of behavior change interventions. The application of these analytic methods across a wide range of services and products within the framework of routine monitoring are innovative achievements, and represent advances to the field of measuring health impact. However, underlying the models are the ubiquitous problems with data quality - even in closely managed social marketing and franchise programs. The broader use of modeling DALYs averted counts will be challenging in settings where the availability of reliable and valid data has been a constraint to capturing accurate measures of performance. The modeling of DALYs averted is a leap in analytic sophistication for programs accustomed to reporting tallies of outputs, as well as more standard rates or ratios as measures of coverage and impact. The requisite skills in complex statistical modeling will be a constraint to the wide-scale diffusion of the DALYs averted technique for monitoring impact. An alternative approach to measuring a program’s impact is to assess its contribution to national health goals, rather than suggest attribution to changes in population health status. Family planning programs are assessed on an aggregate level by changes in the population’s contraceptive prevalence and on a programmatic level by couple-years of protection (CYPs). CYPs convert the number of contraceptives distributed into numbers of contraceptive users. The Marie Stopes International Impact 2 model goes the next step by using an innovative technique that estimates a service delivery organization’ sm arginal contribution to population-level contraceptive prevalence rates (CPR) that is

Implied Cost of Equity: CAPM Versus Fama-French

This study uses U.S. implied cost of equity estimates to compare the CAPM with a risk-return version of the Fama-French model. The risk-return Fama-French model assumes that the size and value factors proxy for the risk of nonmarketable assets, like human capital and entrepreneurial income. The implied cost of equity estimates are a closer fit with the risk-return Fama-French model than with the CAPM.

A Comparison of Cost of Equity Estimates of Local and Global CAPM: Experience from a Developing Country, Mexico

Given that Mexican companies holding foreign currency debt are extremely exposed to the volatility in currency exchange rates, we ask if the required returns determined by the Local CAPM model and those determined by the Global CAPM model are significantly different. In our study, which was conducted between 2006 and 2010, we found the two models projected significantly different estimated capital costs. We tracked 19 companies that trade on the Mexican Stock Market and found that the average of the Local CAPM is 13.83% while that of the Global CAPM is 20.38%. Our discovery that the estimated cost of capital for the Mexican firms in the global capital market is significantly higher than in the local — reaching 1000basis points in some cases — suggests the need for further studies to investigate the statistical and economic significance of this difference.