Estimating the cost of capital with basis assets

Research output: Contribution to journalArticleResearchpeer-review

1 Citation (Scopus)

Abstract

Instead of using industry groups or asset pricing models to estimate the cost of capital we propose using risk equivalent classes known as basis assets. A basis asset is constructed by grouping firms together whose returns indicate they share a common risk exposure, which in theory permits a precise and accurate expected return estimate. Thus, knowing to which basis asset a firm belongs, the firm s cost of capital can be obtained. Empirically, we show that basis assets lead to superior cost of capital estimates when compared with widely used industry groupings. This means we are no longer reliant on asset pricing models or industry groups to estimate the cost of capital of a firm.
Original languageEnglish
Pages (from-to)3071 - 3079
Number of pages9
JournalJournal of Banking and Finance
Volume36
Issue number11
DOIs
Publication statusPublished - 2012

Cite this

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title = "Estimating the cost of capital with basis assets",
abstract = "Instead of using industry groups or asset pricing models to estimate the cost of capital we propose using risk equivalent classes known as basis assets. A basis asset is constructed by grouping firms together whose returns indicate they share a common risk exposure, which in theory permits a precise and accurate expected return estimate. Thus, knowing to which basis asset a firm belongs, the firm s cost of capital can be obtained. Empirically, we show that basis assets lead to superior cost of capital estimates when compared with widely used industry groupings. This means we are no longer reliant on asset pricing models or industry groups to estimate the cost of capital of a firm.",
author = "Stephen Brown and Lajbcygier, {Paul Richard} and Wong, {Woon Weng}",
year = "2012",
doi = "10.1016/j.jbankfin.2012.07.002",
language = "English",
volume = "36",
pages = "3071 -- 3079",
journal = "Journal of Banking and Finance",
issn = "0378-4266",
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}

Estimating the cost of capital with basis assets. / Brown, Stephen; Lajbcygier, Paul Richard; Wong, Woon Weng.

In: Journal of Banking and Finance, Vol. 36, No. 11, 2012, p. 3071 - 3079.

Research output: Contribution to journalArticleResearchpeer-review

TY - JOUR

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AU - Brown, Stephen

AU - Lajbcygier, Paul Richard

AU - Wong, Woon Weng

PY - 2012

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N2 - Instead of using industry groups or asset pricing models to estimate the cost of capital we propose using risk equivalent classes known as basis assets. A basis asset is constructed by grouping firms together whose returns indicate they share a common risk exposure, which in theory permits a precise and accurate expected return estimate. Thus, knowing to which basis asset a firm belongs, the firm s cost of capital can be obtained. Empirically, we show that basis assets lead to superior cost of capital estimates when compared with widely used industry groupings. This means we are no longer reliant on asset pricing models or industry groups to estimate the cost of capital of a firm.

AB - Instead of using industry groups or asset pricing models to estimate the cost of capital we propose using risk equivalent classes known as basis assets. A basis asset is constructed by grouping firms together whose returns indicate they share a common risk exposure, which in theory permits a precise and accurate expected return estimate. Thus, knowing to which basis asset a firm belongs, the firm s cost of capital can be obtained. Empirically, we show that basis assets lead to superior cost of capital estimates when compared with widely used industry groupings. This means we are no longer reliant on asset pricing models or industry groups to estimate the cost of capital of a firm.

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DO - 10.1016/j.jbankfin.2012.07.002

M3 - Article

VL - 36

SP - 3071

EP - 3079

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

SN - 0378-4266

IS - 11

ER -