Essays in Industry Cost of Equity and Return Dynamics

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Author(s)
Primary Supervisor
Bornholt, Graham
Other Supervisors
Malin, Mirela
Year published
2014
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Industry-level equity research is a relatively small but rapidly growing area of interest to finance academics. Costs of equity estimation as well as investigations into various anomalies such as the momentum, contrarian, value and size effects have mostly focused on individual stock returns rather than industry returns. Using a sample of U.S. industry returns, this thesis investigates two broad areas: industry cost of equity estimation and aspects of industry return predictability. This thesis presents three empirical chapters that cover industry cost of equity estimation, an examination of the long-term return reversal of ...
View more >Industry-level equity research is a relatively small but rapidly growing area of interest to finance academics. Costs of equity estimation as well as investigations into various anomalies such as the momentum, contrarian, value and size effects have mostly focused on individual stock returns rather than industry returns. Using a sample of U.S. industry returns, this thesis investigates two broad areas: industry cost of equity estimation and aspects of industry return predictability. This thesis presents three empirical chapters that cover industry cost of equity estimation, an examination of the long-term return reversal of industry returns, and finally research into the existence of value effects at the industry level. Previous research on industries shows that the Fama-French three-factor model and the Cahart four-factor model do not produce significantly better cost of equity (CE) estimates than those produced by the Capital Asset Pricing Model (CAPM). The first empirical study investigates the bias of the standard CAPM approach for each industry separately, and examines the effectiveness of a number of alternative beta estimators in producing CE estimates. The alternative beta estimators are a Blume-adjusted beta and a range of constant betas. CE estimates are judged on the basis of how well they predict the industry’s expected return (as proxied by average annual return over the next five or eight years). Performance evaluations are based on mean absolute forecast error (MAE).
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View more >Industry-level equity research is a relatively small but rapidly growing area of interest to finance academics. Costs of equity estimation as well as investigations into various anomalies such as the momentum, contrarian, value and size effects have mostly focused on individual stock returns rather than industry returns. Using a sample of U.S. industry returns, this thesis investigates two broad areas: industry cost of equity estimation and aspects of industry return predictability. This thesis presents three empirical chapters that cover industry cost of equity estimation, an examination of the long-term return reversal of industry returns, and finally research into the existence of value effects at the industry level. Previous research on industries shows that the Fama-French three-factor model and the Cahart four-factor model do not produce significantly better cost of equity (CE) estimates than those produced by the Capital Asset Pricing Model (CAPM). The first empirical study investigates the bias of the standard CAPM approach for each industry separately, and examines the effectiveness of a number of alternative beta estimators in producing CE estimates. The alternative beta estimators are a Blume-adjusted beta and a range of constant betas. CE estimates are judged on the basis of how well they predict the industry’s expected return (as proxied by average annual return over the next five or eight years). Performance evaluations are based on mean absolute forecast error (MAE).
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Thesis Type
Thesis (PhD Doctorate)
Degree Program
Doctor of Philosophy (PhD)
School
Griffith Business School
Copyright Statement
The author owns the copyright in this thesis, unless stated otherwise.
Item Access Status
Public
Subject
Industry-level equity research
Costs of equity
Capital Asset Pricing Model (CAPM)
Fama-French three-factor model
Cahart four-factor model