Industry cost of equity capital: European evidence for multifactor models

Abstract

We estimate the costs of equity capital for 117 industries from 16 European countries employing the CAPM and 8 multifactor asset pricing models as well as a variety of different econometric techniques. In doing so, we extend previous research on cost of equity estimation in mainly two ways. First, our study involves European instead of US or UK industries, which are investigated in previous research, and we find that cost of equity estimates obtained from the CAPM or multifactor asset pricing models are as imprecise for European industries as for US and UK industries. Second, in addition to the CAPM, the Fama and French [1993. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics 33: 3–56] three-factor model, and the Carhart [1997. “On Persistence in Mutual Fund Performance.” The Journal of Finance 52 (1): 57–82] four-factor model, which are usually employed, our study includes six multifactor models that have not yet been examined on their models provide even more imprecise cost of equity estimates. One main reason for these inaccurate estimates is the large temporal variation of the risk loadings on the non-traded factors in these models

Internal control quality, voluntary disclosure, and cost of equity capital: The case of an unregulated market

“…Finally, internal control procedures may differ across industries, since the industrial sector is generally characterized by a longer firm production cycle due to unfinished production activities and complex production processes compared with the commercial sector (Dechow & Dichev, ). Lutzenberger () has shown that cost of equity, as estimated by the CAPM approach, varies considerably across sectors. Accordingly, we include a dummy variable that equals 1 for industrial companies and 0 otherwise.…”