European Union enlargement and equity cost: an empirical analysis on risk sharing and market integration

This paper provides an empirical investigation of the manifestation of risk in the cost of equity within the European Union. Risk is measured in terms of legal, political and currency factors. The methodology uses an extended version of the capital asset pricing model, applied to the sample for two time periods, with reference to each country's official incorporation to the EU. In particular, the paper examines the contribution of each risk factor before and after the 2003 European enlargement and, in an attempt to assess the level of 'European homogeneity', it tests for convergence in the cost of capital. The results verify the significance of the preceding risk variables in the formation of the cost of equity and the discrepancy between the convergence rates of new and old members.