Reviews

Estimating individual company costs of capital from cross‐sectional data: A random coefficients approach

“…The purpose of this study is to extend the empirical analysis of the cost of equity capital for electric utilities by Thompson (1979) to include a recognition of potentially differing equity costs and growth expectations among companies in the industry. The empirical approach proposed here offers potential for:…”

“…(1) Generating individual company costs of equity capital by statistical analysis of industry data; (2) Bringing statistical analysis of industry data directly to bear on the process of rate making for individual utilities;…”

“…Previous work on estimation of the cost of equity capital for electric utilities includes Miller and Modigliani (1966), Litzenberger and Rdo (1971), McDonald (1971), Higgins (1974) and Thompson (1979).' Each of these studies implicitly assumes that the companies studies belong to a single risk class.…”

“…In this paper the Thompson (1979) model and data set will be used with a random coefficient's approach to develop unique parameter values for individual companies. These parameter values can then be transformed into estimates of the cost of equity capital and the expected growth for each company.…”

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The purpose of this study is to extend the empirical analysis of Thompson (1979) to generate individual company costs of equity capital from statistical analysis of cross-sectional industry data. The paper uses a new random coefficients regression approach on 18 eross-sections of 75 electric utilities for the years 1%3-1980.

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