IDEAS home Printed from https://ideas.repec.org/a/bfr/quarte/20164403.html
   My bibliography  Save this article

The cost of equity for large non-financial companies in the euro area: an estimation over the last decade

Author

Listed:
  • C. Mazet-Sonilhac
  • J.-S. Mésonnier

Abstract

The cost of equity (CoE) borne by a company is a significant component of its overall cost of financing, which influences a firm’s ability to invest, notably in innovative projects with more uncertain, longer-term returns. Theoretically, the CoE is equal to the return expected by an investor to buy a share in the company as compensation for the risk incurred. It cannot be observed directly but may be estimated by applying an equity valuation model to the company’s stockmarket data. This article proposes an estimation of the average CoE for large listed companies in the four largest euro area countries over the 2006-16 period. We find that average CoE rose sharply during the 2008-09 financial crisis and again during the euro area sovereign debt crisis in 2011-12. It declined in nominal terms thereafter, falling below 10% in late June 2016, i.e. on a par with pre-2008 levels. However, since 2008, the long-term nominal risk-free interest rate has decreased from around 4% to virtually 0% in the euro area, notably owing to the Eurosystem’s highly accommodative non-standard monetary policies. The fact that the CoE has seemingly stabilised therefore reflects a trend increase in the equity risk premium (ERP). Yet because of the impact of monetary policy on firms’ cost of debt, which has fallen to historically low levels, this stabilisation of the CoE has been accompanied by a decline in the weighted average cost of capital (WACC) for large companies over recent years.

Suggested Citation

  • C. Mazet-Sonilhac & J.-S. Mésonnier, 2016. "The cost of equity for large non-financial companies in the euro area: an estimation over the last decade," Quarterly selection of articles - Bulletin de la Banque de France, Banque de France, issue 44, pages 28-39, Winter.
  • Handle: RePEc:bfr:quarte:2016:44:03
    as

    Download full text from publisher

    File URL: https://publications.banque-france.fr/sites/default/files/medias/documents/qsa44_winter-2016.pdf#page=28
    Download Restriction: no

    References listed on IDEAS

    as
    1. Marcel P. Timmer & Erik Dietzenbacher & Bart Los & Robert Stehrer & Gaaitzen J. Vries, 2015. "An Illustrated User Guide to the World Input–Output Database: the Case of Global Automotive Production," Review of International Economics, Wiley Blackwell, vol. 23(3), pages 575-605, August.
    2. Pol Antràs & Davin Chor, 2013. "Organizing the Global Value Chain," Econometrica, Econometric Society, vol. 81(6), pages 2127-2204, November.
    3. Robert Koopman & Zhi Wang & Shang-Jin Wei, 2014. "Tracing Value-Added and Double Counting in Gross Exports," American Economic Review, American Economic Association, vol. 104(2), pages 459-494, February.
    4. Rafael Cezar & Octavio Escobar, 2015. "Institutional distance and foreign direct investment," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 151(4), pages 713-733, November.
    5. R. Cezar & A. Duguet & G. Gaulier & V. Vicard, 2017. "Competition for global value added: domestic and export market shares," Rue de la Banque, Banque de France, issue 36, january..
    6. IRC Trade Task Force & Cabrillac, Bruno & Al-Haschimi, Alexander & Babecká Kucharčuková, Oxana & Borin, Alessandro & Bussière, Matthieu & Cezar, Raphael & Derviz, Alexis & Dimitropoulou, Dimitra & Fer, 2016. "Understanding the weakness in global trade - What is the new normal?," Occasional Paper Series 178, European Central Bank.
    7. R. Cezar. & A. Duguet. & G. Gaulier. & V. Vicard., 2016. "Competition for global value added: domestic and export market shares," Quarterly selection of articles - Bulletin de la Banque de France, Banque de France, issue 41, pages 5-15, spring.
    8. Castor, S. & Caradant, H. & Chauvin, V. & Mosquera Yon, T., 2016. "Les échanges internationaux de services de la France," Bulletin de la Banque de France, Banque de France, issue 204, pages 17-26.
    9. Cayssials, J.-L. & Ranvier, M., 2016. "Stratégies d’internationalisation dans la pharmacie," Bulletin de la Banque de France, Banque de France, issue 205, pages 39-54.
    10. V. Vicard, 2015. "Profit shifting through transfer pricing: evidence from French firm level trade data," Working papers 555, Banque de France.
    11. R. Cezar, 2016. "France’s trade integration measured in value added," Quarterly selection of articles - Bulletin de la Banque de France, Banque de France, issue 43, pages 47-58, Autumn.
    12. Robert Stehrer, 2013. "Accounting Relations in Bilateral Value Added Trade," wiiw Working Papers 101, The Vienna Institute for International Economic Studies, wiiw.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Business financing; cost of equity; equity risk premium; CAPM;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bfr:quarte:2016:44:03. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael brassart). General contact details of provider: http://edirc.repec.org/data/bdfgvfr.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.