by Diro Ejara/Krapl/O’ Brien/Ruiz de Vargas.
For individual companies of 46 countries, we empirically compare cost of equity estimates of three risk-return models: (1) the traditional (local) CAPM; (2) the global CAPM (GCAPM), where the only risk factor is the global market index; and (3) an international CAPM (ICAPM) with two risk factors, the global market index and a wealth-weighted foreign currency index. Using improvements on prior research methods, two main findings are: (1) For the average firm in 33 countries, the difference between the local CAPM and ICAPM cost of equity exceeds 70 basis points. (2) For the average firm in 39 countries, the difference between the GCAPM and ICAPM cost of equity exceeds 40 basis points.
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