Outperformance through Investing in ESG in Need

2018 ◽  
Keyword(s):  
Cost Of Capital ◽  
Equity Capital ◽  
Social Value ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Expected Return ◽  
Positive Return

To maximize their effectiveness, environmental, social, and governance (ESG) strategies should target those ESG firms that are most capital constrained. Inherently, this involves seeking ESG firms that have irrationally high costs of capital and thus high expected return. We replicate results that find returns among ESG firms that are similar to those among non-ESG firms. In addition, we find that sorting stocks based on cost of equity capital generates significant positive return for both ESG and non-ESG firms. Investing in an ESG in Need index, which contains only high-ESG companies and tilts toward firms with high cost of capital, thus generates both higher social value and better return than investing in traditional capitalization-weighted ESG indexes.

Earnings Smoothness, Average Returns, and Implied Cost of Equity Capital

2010 ◽  
Vol 85 (1) ◽  
pp. 315-341 ◽  
Author(s):  
John McInnis
Keyword(s):  
Stock Returns ◽  
Lower Cost ◽  
Cost Of Capital ◽  
Empirical Work ◽  
Earnings Forecasts ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Implied Cost Of Capital ◽  
Earnings Smoothness

ABSTRACT: Despite a belief among corporate executives that smooth earnings paths lead to a lower cost of equity capital, I find no relation between earnings smoothness and average stock returns over the last 30 years. In other words, owners of firms with volatile earnings are not compensated with higher returns, as one would expect if volatile earnings lead to greater risk exposure. Although prior empirical work links smoother earnings to a lower implied cost of capital, I offer evidence that this link is driven primarily by optimism in analysts' long-term earnings forecasts. This optimism yields target prices and implied cost of capital estimates that are systematically too high for firms with volatile earnings. Overall, the evidence is inconsistent with the notion that attempts to smooth earnings can lead to a lower cost of equity capital.

scholarly journals A Better Way To Measure The Cost Of Equity Capital For Small Closely Held Firms

2012 ◽  
Vol 10 (2) ◽  
pp. 97
Author(s):  
Denis O. Boudreaux ◽  
Praveen Das ◽  
Nancy Rumore ◽  
SPUma Rao
Keyword(s):  
Cost Of Capital ◽  
Average Rate ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Publicly Traded ◽  
Simple Method ◽  
Valuation Process ◽  
The Cost ◽  
Privately Owned

A companys cost of capital is the average rate it pays for the use of its capital funds. Estimating the cost of equity capital for a publicly traded firm is much simpler than estimating the same for a small privately held firm. For privately owned firms there is the lack of market based financial information. In business damage cases, valuation of the firm is often a prime interest. A necessary variable in the valuation process is the estimate of the firms cost of capital. Part of the cost of capital is the equity holders or owners required rate of return. The purpose of this paper is to explore the theoretical structure that underlies the valuation process for business damage cases that involve privately owned businesses. Specifically, cost of equity capital estimate methods which appear in the current literature are examined, and a theoretically correct and simple method to measure cost of equity capital for closely held companies is offered.

The Cost of Equity Capital in Stock Portfolios Listed on the Warsaw Stock Exchange Using the Classic CAPM

e-Finanse ◽  
2019 ◽  
Vol 15 (2) ◽  
pp. 48-62
Author(s):  
Stanisław Urbański
Keyword(s):  
Real Options ◽  
Stock Returns ◽  
Cost Of Capital ◽  
Stock Exchange ◽  
Bootstrap Method ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Warsaw Stock Exchange ◽  
The Cost

AbstractThis work is an attempt to estimate the cost of equity capital characteristic among portfolios of companies listed on the Warsaw Stock Exchange in the years 1995-2017. To this end, the classic CAPM is used to estimate the cost of risk. Model tests are based on 252 monthly returns. In order to assess the errors of cost of capital estimation, the bootstrap method is used. The estimated cost of capital refers to the project portfolio with real options on these projects. Stock returns are generated not only by the companies implementing projects but also through real options modifying these projects. The estimated cost of capital can be a valuable indicator for portfolio managers. Also, it can be an approximate indicator for making decisions on the implementation of new investment projects. The estimated cost of capital assumes the highest values for value portfolios. The estimated cost of capital assumes the small values for growth portfolios.

Are Banks Special?

2018 ◽  
Vol 08 (04) ◽  
pp. 1840004 ◽  
Author(s):  
Michel Crouhy ◽  
Dan Galai
Keyword(s):  
Capital Structure ◽  
Cost Of Capital ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Market Conditions ◽  
The Cost ◽  
The Capital Structure

This paper addresses the following question: Are banks special firms that can achieve their goals only with high leverage, above and beyond what is considered acceptable for industrial corporations? This question is related to the issue of the cost of capital and how it is affected by leverage. If we accept the Modigliani–Miller (M&M) theorem (1958), then the capital structure is irrelevant for both the cost of capital and the value of the bank. Specifically, the M&M hypothesis argues that higher levels of equity capital reduce bank leverage and risk, leading to an offsetting decline in banks’ cost of equity capital. Hence, we ask the question whether banks are special firms such that M&M theorem does not apply to banks. We show that M&M propositions cannot be applied for banks primarily because of explicit guarantees and subsidies that provide incentives for increasing leverage. Then, some of the risk faced by the bank is transferred at no cost to the providers of these guarantees and subsidies, giving banks the incentive to increase leverage as much as they can. We show that under perfect market conditions, when risk is fairly priced, this opportunity vanishes.

scholarly journals The Role of Firms’ Life Cycle Stages on Voluntary Disclosure and Cost of Equity Capital in Brazilian Public Companies

2020 ◽  
Vol 17 (6) ◽  
pp. 601-620
Author(s):  
Paulo Victor Novaes ◽  
Jose Elias Almeida
Keyword(s):  
Life Cycle ◽  
Voluntary Disclosure ◽  
Cost Of Capital ◽  
Equity Capital ◽  
Growth Stages ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Public Companies ◽  
Life Cycle Stages ◽  
The Cost

We examine the effects of firms’ life cycle stages on voluntary disclosure and the cost of equity capital. We also examine the relationship between the interaction of life cycle stages and voluntary disclosures measures on cost of equity capital. Our sample consists of non-financial Brazilian public companies, covered by analysts between 2008 and 2014, collected from I/B/E/S and Comdinheiro databases. We find that voluntary disclosure level is higher for firms in maturity and growth stages. We also find that firms in introduction and decline life cycle stages show higher implied cost of capital, however declining firms that increase voluntary disclosure reduce their cost of capital. Moreover, mature firms significantly reduce such inherent risk by reporting social and environmental voluntary information. Our results are useful for investors, practitioners, and regulators to the understanding of the incentives of voluntary disclosure practices.

Promoting Entrepreneurship Education Through Valuation of Cost of Equity

2021 ◽  
pp. 321-347
Author(s):  
Olabanji Oni ◽  
Prince Sivalo Mahlangu
Keyword(s):  
Entrepreneurship Education ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Expected Return ◽  
Extensive Discussion ◽  
The Future ◽  
Future Return ◽  
Beta Coefficient ◽  
Dividend Discount Model

This chapter provided an extensive discussion on promoting entrepreneurship education using capital asset pricing model (CAPM) and Gordon dividend discount Model in the valuation of cost of equity. Researchers have debated on the valid model for valuation cost of equity capital. There are two main models that can be used in the valuation of cost of equity capital; these are CAPM and the Gordon dividend discount model. The Gordon dividend discount model proposed by Myron Gordon is grounded on conventional assumptions. Gordon dividend discount model is built around the future value of dividends expected by the company's shareholders in line with the anticipated growth rate provided. However, CAPM sets its estimation of determining the expected return of a single asset on beta coefficient (β), which is difficult to predict. Predicting of β is based on a company's historical returns and the model asserts that historical returns of a company's stock can help in determining the future return of that stock. Practically, this is undoubtedly difficult to ascertain.

An Examination of the Cost of Capital Implications of FIN 46

2012 ◽  
Vol 87 (4) ◽  
pp. 1105-1134 ◽  
Author(s):  
Carolyn M. Callahan ◽  
Rodney E. Smith ◽  
Angela Wheeler Spencer
Keyword(s):  
Comparative Analysis ◽  
Cost Of Capital ◽  
Balance Sheet ◽  
Equity Capital ◽  
Data Availability ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Variable Interest Entities ◽  
The Cost

ABSTRACT This study examines whether the adoption in 2003 of FASB Interpretation No. 46/R (FIN 46), Consolidation of Variable Interest Entities—An Interpretation of ARB No. 51, changed the cost of capital for affected firms. Using comparative analysis on a broad sample of 11,719 firm-quarter observations for 1,389 firms during the period 1998 through 2005, we find evidence that FIN 46 significantly increased the cost of equity capital for firms with affected variable interest entities (VIEs), an increase of approximately 50 basis points relative to firms reporting no material effect from the standard. Further, firms consolidating these formerly off-balance sheet structures experienced the largest increase. Taken together, these results suggest that FIN 46 reduced the opportunity for firms to use off-balance sheet structures to artificially reduce their cost of capital, a matter of regulatory concern. Data Availability: All data are available from public sources.

scholarly journals A New And Better Way To Measure The Cost Of Equity Capital For Small Closely Held Firms

2011 ◽  
Vol 9 (1) ◽  
Author(s):  
Denis O. Boudreaux ◽  
Spuma Rao ◽  
Jim Underwood ◽  
Nancy Rumore
Keyword(s):  
Current Literature ◽  
Cost Of Capital ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Font Size ◽  
Simple Method ◽  
Theoretical Structure ◽  
Valuation Process ◽  
The Cost

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-family: &quot;Times New Roman&quot;,&quot;serif&quot;; font-size: 10pt;">The purpose of this paper is to explore the theoretical structure that underlies the valuation process for small closely held firms.<span style="mso-spacerun: yes;">&nbsp; </span>Specifically, cost of capital estimate methods which appear in the current literature are examined, and a theoretically correct and simple method to measure cost of equity capital for privately held companies is offered.<span style="mso-spacerun: yes;">&nbsp; </span></span></p>

Does voluntary adoption of XBRL reduce cost of equity capital?

2014 ◽  
Vol 22 (2) ◽  
pp. 86-102 ◽  
Author(s):  
Lizhong Hao ◽  
Joseph H. Zhang ◽  
Jing (Bob) Fang
Keyword(s):  
Financial Reporting ◽  
Lower Cost ◽  
Cost Of Capital ◽  
Equity Capital ◽  
Economic Consequences ◽  
Fiscal Year ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Content Type ◽  
Voluntary Adoption

Purpose – The paper aims to examine whether or not firms voluntarily filing in XBRL (eXtensible Business Reporting Language) format enjoy a lower cost of capital. XBRL, or “interactive data” as the US Securities and Exchange Commission refers to it, is an information format that enables electronic exchange of standardized business and financial information. Design/methodology/approach – The authors investigate whether voluntary adoption of XBRL impacts cost of equity capital using a sample of US firms participated in the SEC Voluntary Filer Program, each matched with a pair of non-XBRL filers (matched by two-digit SIC code, same fiscal yearend, and close total assets in the same year). The authors measure firm-specific cost of equity capital at the fiscal year of last voluntary XBRL filing, using the PEG ratio model proposed by Easton, Gode and Mohanram, and Hou et al. Findings – The results show that cost of equity capital is significantly and negatively associated with XBRL adoption. The magnitude of the coefficient on XBRL suggests that firms voluntarily adopting XBRL are associated with an average reduction in cost of equity capital by 17-20 basis points (conditional on different cost of capital measures). Research limitations/implications – There is a research limitation due to the sample of voluntary XBRL adopters as of self-selection bias. The authors address this issue by using the Heckman two-stage regression procedure. Practical implications – The study provides evidence on the economic consequence of XBRL adoption in that it benefits shareholders by reducing the cost of equity capital. The evidence should provide regulators like the SEC more incentives to mandate the XBRL standard and motivate companies to adopt the standard as well. Originality/value – By showing that voluntary XBRL adopters are associated with lower cost of equity capital, the study provides timely and relevant empirical evidence to the economic consequences of voluntary adoption of XBRL. It also contributes to the limited empirical research on the economic consequences of new information technology and highlights the importance of institutional regulation in shaping the outcomes of new financial reporting format.

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