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Julio Sarmiento-Sabogal

First Name: Julio
Surname: Sarmiento-Sabogal
Department Dept of Applied Finance and Actuarial Studies
Supervisor(s): Mehdi Sadeghi , Ignacio Velez-Pareja

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Paper Title

Revising the Relevance of Accounting Betas in Estimating the Cost of Equity Capital: A Panel Approach

Abstract

This paper is an attempt to re-examine the relationship between six alternative definitions of Accounting Beta and Market Beta using a panel data approach. Consistent with the previous studies, our estimated coefficients for Accounting Betas are statistically significant at the conventional levels. We get further evidence that, i) All calculated Accounting Betas overestimate the Market Beta in a range between 8.8% and 23.3% (P < 0.05), ii) The coefficient estimated based on EBIT to Total Assets ratio is the most closely related to Market Beta with 17% overestimation probability and, iii) The measures based on Total Assets are more correlated with Market Beta, compared to those computed from Common Equity. These findings have important implications for determining the cost of capital in the private equity market.

Keywords

CAPM, Cost of capital, Accounting Betas