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Unlevered betas and the cost of equity capital: An empirical approach

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  • Sarmiento-Sabogal, Julio
  • Sadeghi, Mehdi

Abstract

The present paper calculates the systematic risk within the context of the capital asset pricing model to investigate the significance of financial leverage on systematic risk. Rather than testing the unlevered beta directly, we develop a multinomial model with theoretically predicted targets in the unleveraged/leveraged process. We find that including tax shields in this process is statistically more robust than omitting them. Our results also suggest that the use of the proxy levered beta to address the lack of market information for both non-traded firms and individual business units is not misleading.

Suggested Citation

  • Sarmiento-Sabogal, Julio & Sadeghi, Mehdi, 2014. "Unlevered betas and the cost of equity capital: An empirical approach," The North American Journal of Economics and Finance, Elsevier, vol. 30(C), pages 90-105.
  • Handle: RePEc:eee:ecofin:v:30:y:2014:i:c:p:90-105
    DOI: 10.1016/j.najef.2014.08.002
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    More about this item

    Keywords

    Equity cost; Unlevered beta; Unlisted firms;

    JEL classification:

    • 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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