International financial markets are becoming integrated. Hence, global risk factor are increasingly important for portfolio selection and asset pricing. The recent empirical finance literature has confirmed that both the global market portfolio and exchange rate risk factors constitute important determinants of asset returns. We show, however, that global risk factors do not importantly affect estimates of the cost of equity capital for a remarkably wide variety of companies. We analyze almost 3,300 stocks from nine industrialized countries over the period 1980-1999. Incorporating global factors into cost of capital estimations leads to an adjustment of roughly 50 basis points per annum on average for the U.S. and 70 to 100 basis points for the other countries. Adjustments of this magnitude easily fall inside the margin of error associated with actual cost of capital computations. Specifically for U.S. companies, the amendment of the cost of capital estimate is generally very small. This suggests that global risk factors do not really matter for computing the cost of capital of U.S. firms.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam. in its series Research Paper with number
ERS-2002-100-F&A Revision_Date: 2009-10-07.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.: