DO MULTIFACTOR MODELS CONTRIBUTE TO ESTIMATE THE COST OF EQUITY CAPITAL IN BRAZIL?

Abstract

This study investigates the contribution of well-known multifactor asset pricing models to estimate the cost of equity capital of Brazilian listed companies with the Capital Asset Pricing Model (CAPM), the three-factor model of Fama and French (1993), the Carhart (1997) four-factor model and a five-factor model that consists of an additional illiquidity risk factor. The sample are the returns of individual stocks comprising a portfolio of companies in the IBrX 100 stock index from July 2008 to June 2018. Distributions of individual company cost of equity capital estimates obtained with each model were compared among themselves in the full sample period and two sub-periods. The results suggest that adding extra risk factors to the CAPM does not always translate into different cost of equity capital estimates and significantly greater explanatory power. The practical implication is that the CAPM estimates may often be the same as those obtained by means of more complex models with the added bonus of the CAPM's simplicity.