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The equity premium in 100 textbooks

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  • Fernandez, Pablo

    (IESE Business School)

Abstract

I review 100 finance and valuation textbooks published between 1979 and 2008 by authors such as Brealey and Myers, Copeland, Damodaran, Merton, Ross, Bruner, Bodie, Penman, Weston, Brigham and Arzac and find that their recommendations regarding the equity premium range from 3% to 10%. I also find that several books use different equity premia on different pages. Some of the confusion arises from not distinguishing among the four concepts that the term equity premium designates: historical equity premium, expected equity premium, required equity premium and implied equity premium. Finance textbooks should clarify the equity premium by providing distinguishing definitions of these four concepts and conveying a clearer message about their sensible magnitudes.

Suggested Citation

  • Fernandez, Pablo, 2008. "The equity premium in 100 textbooks," IESE Research Papers D/757, IESE Business School.
    • Handle: RePEc:ebg:iesewp:d-0757
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    File URL: http://www.iese.edu/research/pdfs/DI-0757-E.pdf
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    References listed on IDEAS

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    1. Ravi Jagannathan & Ellen R. McGrattan & Anna Scherbina, 2000. "The declining U.S. equity premium," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Fall), pages 3-19.
    2. Goetzmann, William N. & Ibbotson, Roger G., 2006. "The Equity Risk Premium: Essays and Explorations," OUP Catalogue, Oxford University Press, number 9780195148145.
    3. John O'Hanlon & Anthony Steele, 2000. "Estimating the Equity Risk Premium Using Accounting Fundamentals," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(9&10), pages 1051-1083.
    4. Fernandez, Pablo, 2006. "Equity premium: Historical, expected, required and implied," IESE Research Papers D/661, IESE Business School.
    5. Merton H. Miller, 2000. "The History Of Finance: An Eyewitness Account," Journal of Applied Corporate Finance, Morgan Stanley, vol. 13(2), pages 8-14, June.
    6. Welch, Ivo, 2000. "Views of Financial Economists on the Equity Premium and on Professional Controversies," The Journal of Business, University of Chicago Press, vol. 73(4), pages 501-537, October.
    7. James Claus & Jacob Thomas, 2001. "Equity Premia as Low as Three Percent? Evidence from Analysts' Earnings Forecasts for Domestic and International Stock Markets," Journal of Finance, American Finance Association, vol. 56(5), pages 1629-1666, October.
    8. Mehra, Rajnish (ed.), 2007. "Handbook of the Equity Risk Premium," Elsevier Monographs, Elsevier, edition 1, number 9780444508997.
    9. Philippe Jorion & William N. Goetzmann, 1999. "Global Stock Markets in the Twentieth Century," Journal of Finance, American Finance Association, vol. 54(3), pages 953-980, June.
    10. John O'Hanlon & Anthony Steele, 2000. "Estimating the Equity Risk Premium Using Accounting Fundamentals," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(9‐10), pages 1051-1083, November.
    11. Ivo Welch, 2001. "The Equity Premium Consensus Forecast Revisited," Cowles Foundation Discussion Papers 1325, Cowles Foundation for Research in Economics, Yale University.
    12. Robert S. Harris & Felicia C. Marston & Dev R. Mishra & Thomas J. O’Brien, 2003. "Ex Ante Cost of Equity Estimates of S&P 500 Firms: The Choice Between Global and Domestic CAPM," Financial Management, Financial Management Association, vol. 32(3), Fall.
    13. John B. Guerard & Eli Schwartz, 2007. "Quantitative Corporate Finance," Springer Books, Springer, number 978-0-387-34465-2, December.
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    Cited by:

    1. Liu, Yuan-Chi, 2009. "The slicing approach to valuing tax shields," Journal of Banking & Finance, Elsevier, vol. 33(6), pages 1069-1078, June.
    2. Michael Brian Cohen, 2009. "Estimating the Equity Risk Premium for Economies in the Asian Region," Asian Journal of Finance & Accounting, Macrothink Institute, vol. 1(1), pages 2333-2333, December.

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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • 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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