Unlevered betas and the cost of equity capital: An empirical approach

Julio Sarmiento-Sabogal and Mehdi Sadeghi

The North American Journal of Economics and Finance, 2014, vol. 30, issue C, 90-105

Abstract: The present paper calculates the systematic risk within the context of the capital asset pricing model to investigate the significance of financial leverage on systematic risk. Rather than testing the unlevered beta directly, we develop a multinomial model with theoretically predicted targets in the unleveraged/leveraged process. We find that including tax shields in this process is statistically more robust than omitting them. Our results also suggest that the use of the proxy levered beta to address the lack of market information for both non-traded firms and individual business units is not misleading.

Keywords: Equity cost; Unlevered beta; Unlisted firms (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:30:y:2014:i:c:p:90-105

DOI: 10.1016/j.najef.2014.08.002

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