Damodaran’s Country Risk Premium: A Serious Critique

Abstract

For several years, when setting discount rates Damodaran has advocated more consideration of country risk premiums (CRP) when it comes to assessing companies with activities in emerging markets. In this paper we want to perform a systematic analysis and critical discussion of his CRP concept. It will turn out that Damodaran’s concept of a country risk premium (CRP) is of no relevance in academic circles, has no theoretical basis neither is the CRP concept empirically supported. Furthermore, the rates of return on capital that are derived by such methods are highly arbitrary.