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Empirical Evidence for Models to Estimate the Cost of Equity Capital

Author

Listed:
  • Eliseu Martins

    (USP - University of São Paulo)

  • Fernando Caio Galdi

    (USP - University of São Paulo)

  • Gerlando Augusto Sampaio Franco de Lima

    (USP - University of São Paulo)

  • George Anthony Necyk

    (USP - University of São Paulo)

  • Cesar Henrique Shogi Abe

    (USP - University of São Paulo)

Abstract

This article investigates whether there are statistically significant differences among the costs of equity capital of Brazilian companies estimated by four models and their variants: Gordon, CAPM, APM and Ohlson-Juettner. We used a cross-section of 34 companies that were part of the São Paulo Stock Exchange Index (IBOVESPA) on December 29, 2005. The results do not permit saying that the choice of model makes no difference in estimating the cost of equity capital, so the methodology hypothesis was rejected. The models based on profit and dividend projections, notably the OJ and Gordon models, resulted in equivalent mean values and also were those that most resemble each other. The OJ model appears to be theoretically superior to the Gordon and Gordon & Gordon models, given that it was developed with fewer premises and in a more analytic manner.

Suggested Citation

  • Eliseu Martins & Fernando Caio Galdi & Gerlando Augusto Sampaio Franco de Lima & George Anthony Necyk & Cesar Henrique Shogi Abe, 2006. "Empirical Evidence for Models to Estimate the Cost of Equity Capital," Brazilian Business Review, Fucape Business School, vol. 3(2), pages 135-152, July.
    • Handle: RePEc:bbz:fcpbbr:v:3:y:2006:i:2:p:135-152
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    References listed on IDEAS

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    1. Luzi Hail, 2002. "The impact of voluntary corporate disclosures on the ex-ante cost of capital for Swiss firms," European Accounting Review, Taylor & Francis Journals, vol. 11(4), pages 741-773.
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