Empirical analysis of the Hsia option-pricing based model cost of capital

Detalhes bibliográficos
Autor(a) principal: Neves, João C.
Data de Publicação: 2011
Outros Autores: Pimentel, Pedro
Tipo de documento: Artigo
Idioma: eng
Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
Texto Completo: http://hdl.handle.net/10400.3/4976
Resumo: The cost of capital is a fundamental concept in strategic decisions such as capital investments, capital structure, new issues, mergers and acquisitions, spin-offs and other corporate restructurings. This paper explores empirically the option-based model developed by Hsia (1991) for estimating the cost of equity and the cost of capital of the firm. The composition of the sample in this exploratory study is all 17 non-financial companies listed in the Euronext Lisbon that are included in the market index PSI20. The Hsia model is used for estimating the cost of equity and the cost of capital of the firm for these 17 companies and is compared to the estimates obtained from the Capital Asset Pricing Model (CAPM) and the traditional weighted average cost of capital (WACC). The difference between the means of the cost of equity estimated by Hsia model and CAPM is not statistically significant at 1% level and their correlation of 46.2% is statistically significant at 1% level. However, the differences at the individual level are quite large. One of the limitations found in this study was the inconsistency on the computation of the cost of debt. The problem arise from the fact that the cost of debt do not follow the pattern expected in the theory, but we also find that the Hsia model is unable to deal with potential inconsistencies of the financial market.
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spelling Empirical analysis of the Hsia option-pricing based model cost of capitalCost of EquityOption Based Cost of CapitalWeighted Average Cost of CapitalCapital Assets Pricing ModelThe cost of capital is a fundamental concept in strategic decisions such as capital investments, capital structure, new issues, mergers and acquisitions, spin-offs and other corporate restructurings. This paper explores empirically the option-based model developed by Hsia (1991) for estimating the cost of equity and the cost of capital of the firm. The composition of the sample in this exploratory study is all 17 non-financial companies listed in the Euronext Lisbon that are included in the market index PSI20. The Hsia model is used for estimating the cost of equity and the cost of capital of the firm for these 17 companies and is compared to the estimates obtained from the Capital Asset Pricing Model (CAPM) and the traditional weighted average cost of capital (WACC). The difference between the means of the cost of equity estimated by Hsia model and CAPM is not statistically significant at 1% level and their correlation of 46.2% is statistically significant at 1% level. However, the differences at the individual level are quite large. One of the limitations found in this study was the inconsistency on the computation of the cost of debt. The problem arise from the fact that the cost of debt do not follow the pattern expected in the theory, but we also find that the Hsia model is unable to deal with potential inconsistencies of the financial market.Universidade dos AçoresRepositório da Universidade dos AçoresNeves, João C.Pimentel, Pedro2019-01-25T10:40:31Z2011-012011-01-01T00:00:00Zinfo:eu-repo/semantics/publishedVersioninfo:eu-repo/semantics/articleapplication/pdfhttp://hdl.handle.net/10400.3/4976engNeves, João C.; Pimentel, Pedro (2011). Empirical analysis of the Hsia option-pricing based model cost of capital, “Working Paper Series”, nº 3/11, 19 pp.. Ponta Delgada: Universidade dos Açores, CEEAplA-A.info:eu-repo/semantics/openAccessreponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)instname:Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãoinstacron:RCAAP2022-12-20T14:33:15Zoai:repositorio.uac.pt:10400.3/4976Portal AgregadorONGhttps://www.rcaap.pt/oai/openaireopendoar:71602024-03-19T16:27:17.191404Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) - Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãofalse
dc.title.none.fl_str_mv Empirical analysis of the Hsia option-pricing based model cost of capital
title Empirical analysis of the Hsia option-pricing based model cost of capital
spellingShingle Empirical analysis of the Hsia option-pricing based model cost of capital
Neves, João C.
Cost of Equity
Option Based Cost of Capital
Weighted Average Cost of Capital
Capital Assets Pricing Model
title_short Empirical analysis of the Hsia option-pricing based model cost of capital
title_full Empirical analysis of the Hsia option-pricing based model cost of capital
title_fullStr Empirical analysis of the Hsia option-pricing based model cost of capital
title_full_unstemmed Empirical analysis of the Hsia option-pricing based model cost of capital
title_sort Empirical analysis of the Hsia option-pricing based model cost of capital
author Neves, João C.
author_facet Neves, João C.
Pimentel, Pedro
author_role author
author2 Pimentel, Pedro
author2_role author
dc.contributor.none.fl_str_mv Repositório da Universidade dos Açores
dc.contributor.author.fl_str_mv Neves, João C.
Pimentel, Pedro
dc.subject.por.fl_str_mv Cost of Equity
Option Based Cost of Capital
Weighted Average Cost of Capital
Capital Assets Pricing Model
topic Cost of Equity
Option Based Cost of Capital
Weighted Average Cost of Capital
Capital Assets Pricing Model
description The cost of capital is a fundamental concept in strategic decisions such as capital investments, capital structure, new issues, mergers and acquisitions, spin-offs and other corporate restructurings. This paper explores empirically the option-based model developed by Hsia (1991) for estimating the cost of equity and the cost of capital of the firm. The composition of the sample in this exploratory study is all 17 non-financial companies listed in the Euronext Lisbon that are included in the market index PSI20. The Hsia model is used for estimating the cost of equity and the cost of capital of the firm for these 17 companies and is compared to the estimates obtained from the Capital Asset Pricing Model (CAPM) and the traditional weighted average cost of capital (WACC). The difference between the means of the cost of equity estimated by Hsia model and CAPM is not statistically significant at 1% level and their correlation of 46.2% is statistically significant at 1% level. However, the differences at the individual level are quite large. One of the limitations found in this study was the inconsistency on the computation of the cost of debt. The problem arise from the fact that the cost of debt do not follow the pattern expected in the theory, but we also find that the Hsia model is unable to deal with potential inconsistencies of the financial market.
publishDate 2011
dc.date.none.fl_str_mv 2011-01
2011-01-01T00:00:00Z
2019-01-25T10:40:31Z
dc.type.status.fl_str_mv info:eu-repo/semantics/publishedVersion
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status_str publishedVersion
dc.identifier.uri.fl_str_mv http://hdl.handle.net/10400.3/4976
url http://hdl.handle.net/10400.3/4976
dc.language.iso.fl_str_mv eng
language eng
dc.relation.none.fl_str_mv Neves, João C.; Pimentel, Pedro (2011). Empirical analysis of the Hsia option-pricing based model cost of capital, “Working Paper Series”, nº 3/11, 19 pp.. Ponta Delgada: Universidade dos Açores, CEEAplA-A.
dc.rights.driver.fl_str_mv info:eu-repo/semantics/openAccess
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dc.publisher.none.fl_str_mv Universidade dos Açores
publisher.none.fl_str_mv Universidade dos Açores
dc.source.none.fl_str_mv reponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
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