Estimating the cost of equity for private firms using accounting fundamentals

Sarmiento-Sabogal, Julio; Sadeghi, Mehdi

doi:10.1080/00036846.2014.969826

Cited by 13 publications

(7 citation statements)

References 36 publications

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“…The regression approach cannot be applied to unlisted companies, as there are no historical stock returns available and the beta factor is estimated on the basis of beta factors of comparable companies in the industry (DVFA Expert Group “Corporate Transactions and Valuation”, 2012; Sarmiento‐Sabogal & Sadeghi, 2015). The major disadvantage of the method is that the beta factor that is determined largely depends on the choice of comparable companies (Pettit and Stern Stewart & Co., 1999), meaning that the valuer must proceed with particular care.…”

Section: Problem Statementmentioning

confidence: 99%

Determination of expected cost of equity with the CAPM: Theoretical extension using the law of error propagation

Situm

2020

Manage Decis Econ

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The determination of the expected return on equity based on the capital asset pricing model (CAPM) is an internationally recognized method, although the underlying theory is not without criticism and therefore leaves sufficient room for interpretation. Strictly speaking, the expected return on equity cannot be determined per se, as all parameters of the CAPM have to be estimated and contain measurement errors. The statistical measurement errors would have to be included in the calculation of the expected return on equity. The paper discusses the current view on how the expected return on equity is determined in the Germen‐speaking countries and presents an approach to transfer the measurement errors of the parameter risk‐free rate, market risk premium, and company beta to the calculated return on equity using the Gaussian law of error propagation.

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Section: Problem Statementmentioning

confidence: 99%

Determination of expected cost of equity with the CAPM: Theoretical extension using the law of error propagation

Situm

2020

Manage Decis Econ

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“…They concluded that accounting variables are valuable support to market beta in risk analysis. Sarmiento-Sabogal and Sadeghi (2015) found similarities between accounting betas and market betas for US-listed firms, but they also discovered that accounting betas overestimate the market risk. Cambell, Polok and Vuolteenaho (2010) emphasised the role of accounting information in risk analysis and the calculation of cost of capital.…”

Section: Literature Reviewmentioning

confidence: 92%

Market and Accounting Risk Factors of Asset Pricing in the Classical and Downside Approaches

Rutkowska-Ziarko

Markowski

2020

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Theoretical background: The variability of the company’s profitability is the result of the accompanying risk. To compare the profitability of many companies, relative profitability measures, which include profitability ratios, are more convenient. This article analyses market and accounting risk factors of CAPM. Risk was considered in variance and downside framework. Market betas, accounting betas were used in an extended version of the asset pricing model. Additionally, the influence of profitability ratios, such as ROA and ROE on the average rate of return on the capital market are considered.Purpose of the article: The main purpose of this study is to test the standard and extended CAPM relations between systematic risk measures and mean returns for single companies quoted on the Polish capital market and equally-weighted portfolios in two approaches: variance and downside risk.Research methods: The research based on individual securities and portfolios, compares the one-factor risk-return relationships with two-factor ones estimated using mean returns in cross-sectional regressions. The regressors were expressed in absolute terms and classical and downside beta coefficients. The sample includes companies differing in terms of size and across different industries.Main findings: Portfolios with higher classical or downside market betas generate higher mean returns. The negative risk premium for accounting betas for variance and downside risk was identified. It is not in accordance with our earlier study of the Polish construction sector, where a positive and significant risk premium for downside accounting betas was found. The highest explanatory power of rates on returns on the Polish capital market were found for average ROA and ROE. This confirms the results of the previous studies on the Polish capital market for food and construction sectors.

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“…To this end, several studies have demonstrated that accounting beta presents a relevant measure for calculating risk for unlisted companies (Almisher and Kish 2000;Sarmiento-Sabogal and Sadeghi 2015;Intrisano et al 2017;Rutkowska-Ziarko and Pyke 2017;Teixeira et al 2020;Sarmiento et al 2021;Roque and Caicedo Carrero 2021;Rutkowska-Ziarko 2022). However, other researchers interested in the same issue have concluded that accounting beta does not present a valuable measure of risk for firms (Vos 1992;St-Pierre and Bahri 2006).…”

Section: Introductionmentioning

confidence: 99%

Accounting Beta as an Indicator of Risk Measurement: The Case of the Casablanca Stock Exchange

Faiteh

Aasri

2022

Risks

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The problem of determining the cost of equity is crucial to the development of organizations. It is an essential means of calculating value creation. The financial literature has proposed several models for estimating the cost of equity, such as the capital asset pricing model (CAPM). However, this model is only used for listed companies, and cannot be used for unlisted companies. To remedy this situation, alternative measures of the cost of equity have emerged, such as accounting beta. The main objective of this research was to explore the relationship between market beta and accounting beta calculated using ROA, ROE and net income to demonstrate the ability of accounting beta to measure risk for unlisted companies. To carry out this study, we exploited data from a sample of 49 companies listed on the Casablanca Stock Exchange during the period of 2015–2019. We used panel data econometrics to empirically test the research hypotheses. The results show that the accounting beta calculated using ROA and ROE significantly represents the market beta and is a satisfactory solution to calculate the cost of equity of unlisted firms. The results of the study contribute to the existing literature on the cost of capital by reinforcing the role of accounting beta as a solution for determining the cost of equity and therefore the creation of value for the organization.

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Estimating the cost of equity for private firms using accounting fundamentals

Cited by 13 publications

References 36 publications

Determination of expected cost of equity with the CAPM: Theoretical extension using the law of error propagation

Determination of expected cost of equity with the CAPM: Theoretical extension using the law of error propagation

Market and Accounting Risk Factors of Asset Pricing in the Classical and Downside Approaches

Accounting Beta as an Indicator of Risk Measurement: The Case of the Casablanca Stock Exchange

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