This thesis examines the relationship between systematic risk and accounting variables for non-traded transportation companies and provides an applicable CAPM framework for estimating the cost of equity capital. I extend previous research by assessing the risk relevance of accounting measures in an international multi-beta asset pricing model. The findings indicate that accounting variables can significantly explain systematic risk in this context. However, the non-significance and the signs of certain variables are contradictory to either theoretical assumptions or previous results. Firm size appears to be a key variable in explaining market betas, though positively correlated to systematic risk. A CAPM-linked framework is used to estimate the cost of equity capital which on average range between 5.5% and 8.7% per annum. It can be shown that they substantially vary across divisions and subsidiaries when broken down to single groups of companies.
Table of Contents
I. Introduction
II. Background
A. CAPM and APT – A Review
B. The Risk Relevance of Accounting Variables
C. The Transportation Sector
III. Empirical Methodology
A. The Relevant Global Risk Factors
B. Estimating beta for Listed Companies
C. Relating Accounting Measures to Systematic Risk
D. beta and the Cost of Equity Capital of Non-traded Companies
IV. Data
A. The Sample
B. Global Risk Factors
C. Accounting Variables
V. Empirical Results
A. The Common Risk Factors
B. The Significance of Accounting Variables
C. The Estimated betas
D. The Expected Cost of Equity Capital
E. Evidence from the Field
F. Robustness Tests
VI. Conclusions
Objectives and Research Scope
This thesis investigates the relationship between systematic risk and accounting variables specifically for non-traded transportation companies, aiming to develop an applicable CAPM-based framework to estimate their cost of equity capital in the absence of observable market data.
- Examination of risk relevance of accounting measures in an international multi-beta asset pricing model.
- Evaluation of systematic risk determinants within the highly cyclical transportation sector.
- Comparative analysis of risk profiles between publicly traded and non-traded transportation firms.
- Implementation of a CAPM-linked framework incorporating liquidity risk premiums for non-listed companies.
- Validation of methodologies through field evidence from transportation subsidiaries and divisions.
Excerpt from the Book
I. Introduction
Estimating the cost of equity capital has two major implications. First, it reflects the return to a company’s stock which an equity investor expects to receive from his investment. He makes his decision upon whether he could earn a higher rate of return in an alternative investment of equivalent risk. Second, a company must earn the cost of capital (both debt and equity) through its undertaken projects. It is hence relevant for decisions on undertaking positive net present value projects which are of similar risk as the company’s average business activities. It also substantially influences the pricing of an entire firm as far as the valuation is based on a discounted cash flow model.
A lot of effort has been done in the past to achieve accurate models which precisely determine this cost. Building on the modern portfolio theory of Harry Markowitz (1952), a widely used and commonly known model in this context is the Capital Asset Pricing Model (CAPM). Introduced by several researchers (Sharpe (1964), Lintner (1965) and Mossin (1966)) in the 1960s, it is still one of the most applied methods for practitioners (Graham and Harvey (2001)). However, it suffers from several shortcomings, including statistical caveats, economic assumptions, the absence of market frictions and the behaviour of market participants (Fama and French (2004) and King (2009)). An upgrade to this model was provided by Stephen Ross (1976) which has resulted in the Arbitrage Pricing Theory (APT). It combines several risk factors in addition to one market proxy, as it is the case in the CAPM, and is less restrictive in its assumptions (Reinganum (1980)).
Summary of Chapters
I. Introduction: Outlines the significance of estimating the cost of equity capital and identifies the limitations of standard models (CAPM/APT) when applied to non-traded firms, justifying the need for alternative accounting-based methodologies.
II. Background: Reviews theoretical foundations, including CAPM and APT, discusses the risk relevance of accounting variables, and provides context on the specific risk characteristics of the transportation sector.
III. Empirical Methodology: Details the multi-step regression approach to identify global risk factors, assess accounting variable significance, and ultimately estimate betas and the cost of equity for non-traded firms.
IV. Data: Describes the composition of the dataset, covering both traded and non-traded European transportation companies, and defines the macroeconomic and accounting data sources used for the analysis.
V. Empirical Results: Presents the findings regarding significant risk factors, the predictive power of accounting variables for systematic risk, and the calculated cost of equity capital across various subsectors.
VI. Conclusions: Summarizes the study’s findings, acknowledging the validity of accounting measures for estimating risk in non-traded firms while noting limitations and potential avenues for future research.
Keywords
Systematic risk, Cost of equity capital, Non-traded companies, Transportation sector, CAPM, APT, Accounting variables, Asset pricing, Firm size, Beta estimation, Multi-factor model, Liquidity risk, Financial leverage, Corporate finance, European transportation industry.
Frequently Asked Questions
What is the primary focus of this research?
The research primarily focuses on determining the cost of equity capital for non-traded transportation companies by using accounting variables as proxies for systematic risk in the absence of market price data.
What are the central themes discussed in this work?
The central themes include asset pricing models (CAPM/APT), the relationship between firm-specific accounting figures and market risk, and the unique risk profile of the European transportation industry.
What is the main objective of the thesis?
The goal is to provide a robust empirical framework that allows financial practitioners to estimate the cost of equity for non-listed firms, thereby facilitating better investment and valuation decisions.
Which scientific methods are employed?
The author uses a multi-factor regression approach, step-wise estimation procedures, and a CAPM-linked model that incorporates a liquidity risk premium to correct for potential thin-trading biases.
What content is covered in the main section?
The main sections cover the review of financial theories, the specification of empirical methodologies, a detailed data description, and the discussion of empirical results including sensitivity analyses.
Which keywords characterize this paper?
Key terms include systematic risk, cost of equity capital, transportation sector, non-traded companies, CAPM, accounting variables, and multi-factor asset pricing models.
Why is the transportation sector considered a "curious" case in financial research?
Transportation is often hypothesized to be highly cyclical and risky; however, empirical studies frequently observe surprisingly low market betas, which contradicts theoretical expectations and necessitates further academic investigation.
How does the author handle firms that are not publicly listed?
The author utilizes an indirect estimation approach where accounting data (such as size, leverage, and profitability) from balance sheets and income statements are used to map these firms into a CAPM-derived risk framework.
What is the significance of the "Firm Size" variable in this study?
Firm size emerges as a key variable for explaining market betas, though the author notes a positive correlation which is considered paradoxical compared to standard theoretical assumptions but consistent with some niche empirical findings.
- Arbeit zitieren
- Dipl.-Ing. oec. Sascha Heller (Autor:in), 2010, Estimating beta and Cost of Equity Capital for Non-traded Transportation Companies, München, GRIN Verlag, https://www.grin.com/document/168614
