The influence of the degree of the Russian stock market integration on the cost of equity

2021 ◽  
Vol 27 (10) ◽  
pp. 2172-2196
Author(s):  
Oleg N. SALMANOV
Keyword(s):  
Developing Countries ◽  
Risk Premium ◽  
Market Integration ◽  
Low Cost ◽  
Developed Countries ◽  
Equity Capital ◽  
Country Risk ◽  
Cost Of Equity ◽  
Developed Country ◽  
The Cost

Subject. This paper examines how to determine the cost of equity for a developing economy, if the latter is segmented from the leading developed economy of the world. Objectives. The aim is to establish the importance of determining the cost of equity in the Russian economy, depending on the country of the developed market. Methods. All well-known international methods for determining the cost of equity, taking into account the country risk, are involved in the analysis. For calculations, I use yields of the world’s important market indices. Results. The study shows that the value of equity capital (subject to country risk), which is established under all international methods for the reference market of European developed countries, will be lower. Conclusions. CAPM models, used for developed markets, produce too low cost of capital, when they are applied as-is to developing countries. Therefore, for developing countries, models are used, which rest on the idea of adding a country risk premium to the risk premium, for the reference market of a developed country. This theory does not regulate the choice of a reference market from among developed countries. However, some studies found that the US market is not the most influential for the Russian market. The paper states that the choice of European developed countries provides a 16.8% reduction in the cost of equity, which, in turn, provides an increase in company value by a third.

Corporate governance and cost of equity: empirical evidence from Latin American companies

2016 ◽  
Vol 16 (5) ◽  
pp. 831-848 ◽  
Author(s):  
Emanuele Teti ◽  
Alberto Dell’Acqua ◽  
Leonardo Etro ◽  
Francesca Resmini
Keyword(s):  
Corporate Governance ◽  
Latin American ◽  
Cost Of Capital ◽  
Negative Relationship ◽  
Developed Countries ◽  
Equity Capital ◽  
Cost Of Equity ◽  
Content Type ◽  
The Cost ◽  
The Relationship

Purpose This paper aims to investigate the extent to which corporate governance (CG) systems adopted by Latin American listed firms affect their cost of equity capital. Several studies on the link between the two aforementioned dimensions have been carried out, but none in the context of Latin American firms. Design/methodology/approach A CG index is created by taking into account the peculiarities of each country and the recommendations given by the corresponding CG institutes. In particular, to assess the level of CG quality, three sub-indexes have been identified: “Disclosure”, “Board of Directors” and “Shareholder Rights, Ownership and Control Structure”. Findings The results indicate a negative relationship between CG quality and the cost of equity. In particular, the “Disclosure” component is the one mostly affecting the cost of equity. Research limitations/implications This study contributes to the literature by adding knowledge on the relationship between CG and cost of capital considering, for the first time, the overall Latin American market. Practical implications The paper proves that institutional investors all over the world are disposed to pay a premium to invest in firms with effective CG standards; moreover, this premium is higher in emerging countries such as those analyzed in this paper, rather than in developed countries. Originality/value To the authors' knowledge, this is the first paper empirically investigating the relationship between CG and cost of capital in Latin America.

scholarly journals The Impact of Currency Risk on Firm’s Value in Emerging Countries

2019 ◽  
Vol 13 (1) ◽  
pp. 7-27
Author(s):  
Ilia Kuchin ◽  
Mariia Elkina ◽  
Yury Dranev
Keyword(s):  
South Africa ◽  
Exchange Rate ◽  
Risk Premium ◽  
Emerging Countries ◽  
Equity Capital ◽  
Cost Of Equity ◽  
Currency Risk ◽  
Return On Equity ◽  
The Cost ◽  
The Impact

This study is dedicated to estimating the impact of currency risk on the cost of equity in Brazil, Russia, India and South Africa. Our contribution to the literature is that we obtain further evidence on pricing of exchange rate risk in developing countries which for now is quite scarce. These motivates our research which is dedicated to BRICS capital markets with Chinese stock market excluded since it is heavily regulated. The aim of the research is to determine whether in emerging countries stock markets currency risk is a significant factor that influence cost of equity capital of a company. Changes in the value of exchange rate can impact cash flows of a firm and their riskiness, hence, the value of the company. In our research we will discuss the influence of exchange rate movements on the value of the firm through their impact on the cost of equity. Specifically, we investigate whether companies that report substantial currency gains or losses have to pay a higher required return on equity. Furthermore, in this study we take an attempt to estimate currency risk premia for exposure to appreciation and depreciation of currency separately and identify possible differences. For each country three models that extend Fama-French Three Factor Model by incorporating currency risk are estimated. We used equal-weighted portfolio approach to construction currency risk factors. They are estimated using information about the ratio of currency gains to sales or the magnitude of covariation between equity returns and exchange rate changes. In the second case appreciation and depreciation of domestic currency against US dollar is considered separately. Results indicate that in Russia firms which report substantial currency losses pay a positive risk premium, while in Brazil, India and South Africa companies with significantly positive or negative currency gains pay a lower required return on equity than firms with almost zero currency gains. Finally, we are trying to explain estimation results using sectoral breakdown of product exports in each country of data sample.

Pengaruh Kualitas Corporate Governance Terhadap Cost Of Equity Perusahaan Manufaktur Di Indonesia

2018 ◽  
Vol 13 (1) ◽  
Author(s):  
Fiki Kartika
Keyword(s):  
Corporate Governance ◽  
Risk Premium ◽  
Manufacturing Industry ◽  
Equity Capital ◽  
Manufacturing Companies ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Ex Ante ◽  
The Cost ◽  
The Impact

This research aims to determine the impact of Good Corporate Governance (GCG) on the cost of equity for manufacturing companies in Indonesia. The sampling technique uses purposive sampling, namely companies listed on the Indonesia Stock Exchange. The analysis was carried out in the Manufacturing industry sector in 2013 - 2015. The GCG index was measured using five dimensions adopted from Black et al. (2003) and Cost of Equity is measured by the ex ante cost of equity capital using the Price Earning Growth (PEG) proxy. The reason for using ex ante cost of equity capital is ex-ante is more describing the role of investors in seeing the risk of a company. The results of this study indicate that GCG negatively affects on the cost of equity. GCG limits managerial opportunism and reduces agency conflicts between owners and agents. Therefore, shareholders are willing to accept a lower risk premium, effectively reducing equity costs.

scholarly journals A Practical Approach To Estimating The Cost Of Equity For South African Firms Undertaking Cross-Border Investments

2018 ◽  
Vol 17 (2) ◽  
pp. 35-46
Author(s):  
Vusani Moyo
Keyword(s):  
South African ◽  
Risk Premium ◽  
Credit Rating ◽  
Cost Of Equity ◽  
Developed Country ◽  
Additional Risk ◽  
Cross Border ◽  
The Cost ◽  
Cost Equity

Corporate finance literature has developed a number of models for use in estimating the cost equity in for cross-border investments. Most of the models, if not all, are specifically developed for use by US firms investing in emerging markets. The widely used models are the home country CAPM, the local CAPM, the country-risk adjusted CAPM or the Lessard model, the Godfrey-Espinosa model, the Goldman Sachs model, the Gamma model and the SalomonSmithBarney model. Using a hypothetical case study of FirstRand Limited’s proposed investments in Ireland and Turkey, this study tests for the suitability of the reverse-engineered versions of these models in estimating the cost of equity for a South African firm planning to invest in both Ireland (developed country) and Turkey (emerging country). The results of the study indicate that the Godfrey-Espinosa the Goldman-Sachs models are equivalent.  The Lassard model is equivalent to the Gamma or Damodaran mode, and both models yielded estimates closer to the SalomonSmithBarney model. All the models’ estimates for the Turkish investment are consistent with the credit ratings of both Turkey and South Africa. The cost equity estimates show that FirstRand Limited investors will demand an additional risk premium for investments in Turkey. The cost of equity estimates for the Irish investment are mixed, inconsistent with the Ireland’s credit rating and had a higher standard deviation than the estimates for the Turkish investment. The Irish estimates seem to be largely affected by the country’s high country and banking industry betas. The reverse-engineered versions of these models are suitable for use by firms in emerging countries.

Accruals Quality, Stock Returns, and Macroeconomic Conditions

2010 ◽  
Vol 85 (3) ◽  
pp. 937-978 ◽  
Author(s):  
Dongcheol Kim ◽  
Yaxuan Qi
Keyword(s):  
Stock Returns ◽  
Risk Premium ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Cross Sectional ◽  
Macroeconomic Conditions ◽  
Accruals Quality ◽  
Quality Stock ◽  
The Cost

ABSTRACT: This study examines whether and how earnings quality, measured as accruals quality (AQ), affects the cost of equity capital. Using two-stage cross-sectional regression tests, we find that the AQ risk factor is significantly priced, after controlling for low-priced stocks. This result is robust in tests using individual stocks, various portfolio formations, and different beta estimations. Furthermore, we show that AQ and its pricing effect systematically vary with business cycles and macroeconomic variables. In particular, this pricing effect is prominent in total AQ and innate AQ but not in discretionary AQ. The risk premium associated with AQ exists only in economic expansion but not in recession periods. Poorer AQ firms are more vulnerable to macroeconomic shocks. The risk premium and the dispersion of AQ are also related to future economic activity. Overall, our results suggest that AQ contributes to the cost of equity capital and that its pricing effect is associated with fundamental risk.

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