The equity premium in 150 textbooks
AbstractI review 150 textbooks on corporate finance and valuation published between 1979 and 2009 by authors such as Brealey, Myers, Copeland, Damodaran, Merton, Ross, Bruner, Bodie, Penman, and Arzac, and find that their recommendations regarding the equity premium range from 3% to 10%, and that 51 books use different equity premia in various pages. The 5-year moving average has declined from 8.4% in 1990 to 5.7% in 2008 and 2009. Some confusion arises from not distinguishing among the four concepts that the phrase equity premium designates: the historical, the expected, the required, and the implied equity premium. 129 of the books identify expected and required equity premium and 82 identify expected and historical equity premium. Finance textbooks should clarify the equity premium by incorporating distinguishing definitions of the four different concepts and conveying a clearer message about their sensible magnitudes.
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Bibliographic InfoArticle provided by Capco Institute in its journal Journal of Financial Transformation.
Volume (Year): 27 (2009)
Issue (Month): ()
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Corporate finance; valuation; equity premium;
Other versions of this item:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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- Casper van Ewijk & C. Santing, 2010.
"A meta-analysis of the equity premium,"
CPB Discussion Paper
156, CPB Netherlands Bureau for Economic Policy Analysis.
- Anjos, Fernando, 2010. "Costly refocusing, the diversification discount, and the pervasiveness of diversified firms," Journal of Corporate Finance, Elsevier, vol. 16(3), pages 276-287, June.
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