Work

The Cost of Equity: Evidence from Investment Banking Valuations

Year: 2025

Type: article

Abstract: Using manually compiled cost of equity (COE) estimates disclosed in takeover regulatory filings, we provide novel evidence on how investment bankers estimate discount rates. COE estimates are related to several risk proxies, such as beta and size. Other firm characteristics are unrelated to COE estimates or provide relations contradicting academic evidence. We also explore the role of incentives. For example, banks use significantly higher COEs in management buyouts, which potentially underestimates target value, making the bid more attractive for target shareholder approval.

Source: Journal of Financial and Quantitative Analysis

DOI: 10.1017/s0022109024000851

Authors: Gregory W. Eaton, Feng Guo, Tingting Liu, Danni Tu

Institutions: University of Georgia, Iowa State University, University of Tennessee at Knoxville, Southern Illinois University Carbondale

Language: English

Topic: Financial Reporting and Valuation Research

Subfield: Strategy and Management

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,550

OpenAlex ID: W4409207818