The cost of equity for private firms

Menachem Abudy, Simon Benninga and Efrat Shust

Journal of Corporate Finance, 2016, vol. 37, issue C, 431-443

Abstract: The paper presents a method for calculating the cost of equity capital for the non-marketable securities of private firms and its difference from the cost of equity capital of an all else equal public firm (the private firm premium). The method is based on a theoretical framework that assumes the investor is undiversified due to her holdings in non-marketable securities. We implement the method for both unlevered and levered firms, and also consider the effect of taxes. The findings indicate that the private firm premium increases with the firm's asset risk, its leverage ratio, and the non-diversification of the private firm's owner, while taxes are negatively related to the private firm premium.

Keywords: Non-marketability; Non-diversification; Cost of capital; Private firm valuation (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:37:y:2016:i:c:p:431-443

DOI: 10.1016/j.jcorpfin.2016.01.014

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