A Comparison of Cost of Equity Estimates of Local and Global CAPMs


  • Thanks to workshops at UMass-Amherst and University of Giessen (Germany), and to Ben Branch, Walter Dolde, Martin Glaum, Chris Malone, Kevin McLaughlin, Hossein Kazemi, Janet Todd, and an anonymous referee. Thanks also to UConn CIBER and the Keith B. Johnson Finance Faculty Award for financial support.

* Corresponding author: School of Business, U-41F, University of Connecticut, Storrs, CT 06269; Phone: (860) 486-3041; Fax: (860) 486-0349; E-mail: tomo@sba.uconn.edu


Cost of equity estimates are compared for three pricing models: the traditional local CAPM, the single (market) factor global CAPM, and the two-factor global CAPM, with both market and currency index factors. For 2989 US stocks, the average difference in the cost of equity estimates is about 48 basis points between the local CAPM and the single-factor global CAPM, and is about 61 basis points between the two global models. For 70 developed-market ADRs, the corresponding average differences are 76 and 47 basis points, respectively. For 48 emerging-market ADRs, the corresponding average differences are 57 and 70 basis points.