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Cross-Border Valuation: The International Cost of Equity Capital

Author

Listed:
  • Gordon M. Bodnar
  • Bernard Dumas
  • Richard D. Marston

Abstract

How does a firm in one country evaluate an investment in a firm in another country, or how does it evaluate a foreign project that the firm itself is undertaking? The firm must estimate future free cash flows just as in a domestic project, but choosing an appropriate discount rate is a particular challenge. This study examines the determinants of the discount rate for an international acquisition or project by examining the sources of risk in an international setting. These risks include stock-market price risk measured with various versions of the capital asset pricing model, as well as exchange rate risk and political risk. To measure stock market risk, both segmented and integrated models of the world equity markets are considered. The emphasis of the study is on some of the practical aspects of estimation, particular for markets where no comparable investments exist on which to base estimates of risk premiums. To show how each of these risks might be measured, the study reports estimates for a representative French firm, Thals. The estimates range widely depending on whether or not the equity market is globally integrated.

Suggested Citation

  • Gordon M. Bodnar & Bernard Dumas & Richard D. Marston, 2003. "Cross-Border Valuation: The International Cost of Equity Capital," NBER Working Papers 10115, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:10115
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    References listed on IDEAS

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    Cited by:

    1. Geert Bekaert & Michael Ehrmann & Marcel Fratzscher & Arnaud Mehl, 2014. "The Global Crisis and Equity Market Contagion," Journal of Finance, American Finance Association, vol. 69(6), pages 2597-2649, December.
    2. Forssbæck , Jens & Oxelheim, Lars, 2008. "Financial Determinants of Foreign Direct Investment," Working Paper Series 741, Research Institute of Industrial Economics.
    3. Samuel Mongrut Montalván & Didac Ramírez Sarrió, 2005. "Discount Rates in Emerging Capital Markets," Finance 0501013, EconWPA.
    4. Samuel Mongrut & Mauricio Fuenzalida & Samuel Nash & Juan Tapia, 2006. "Tender Offers in South America: Do they Convey Good News to the Market?," Working Papers 06-04, Centro de Investigación, Universidad del Pacífico.
    5. Roggi, Oliviero & Giannozzi, Alessandro & Baglioni, Tommaso, 2017. "Valuing emerging markets companies: New approaches to determine the effective exposure to country risk," Research in International Business and Finance, Elsevier, vol. 39(PA), pages 553-567.
    6. Warnes, Ignacio & Warnes, Pablo E., 2014. "Country risk and the cost of equity in emerging markets," Journal of Multinational Financial Management, Elsevier, vol. 28(C), pages 15-27.
    7. Geert Bekaert & Arnaud Mehl, 2017. "On the Global Financial Market Integration “Swoosh” and the Trilemma," NBER Working Papers 23124, National Bureau of Economic Research, Inc.
    8. Ehrmann, Michael & Fratzscher, Marcel & Mehl, Arnaud & Bekaert, Geert, 2011. "Global crises and equity market contagion," Working Paper Series 1381, European Central Bank.
    9. Bruner, Robert F. & Li, Wei & Kritzman, Mark & Myrgren, Simon & Page, Sébastien, 2008. "Market integration in developed and emerging markets: Evidence from the CAPM," Emerging Markets Review, Elsevier, vol. 9(2), pages 89-103, June.
    10. David Schröder, 2005. "The Implied Equity Risk Premium - An Evaluation of Empirical Methods," Bonn Econ Discussion Papers bgse13_2005, University of Bonn, Germany.
    11. Mazzotta, Stefano, 2008. "How important is asymmetric covariance for the risk premium of international assets?," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1636-1647, August.
    12. Durand, Robert B. & Lan, Yihui & Ng, Andrew, 2011. "Conditional beta: Evidence from Asian emerging markets," Global Finance Journal, Elsevier, vol. 22(2), pages 130-153.
    13. Samuel Mongrut & Dídac Ramírez, 2006. "Discount Rates in Emerging Capital Markets," Working Papers 06-03, Centro de Investigación, Universidad del Pacífico.

    More about this item

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • F3 - International Economics - - International Finance

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