Country Risk – Cost of Equity Measurement: Methodologies and Implications

Evaluating investments in international (and particularly in emerging) markets often leads to confusion and controversy among academics and practitioners. Various theories propose competing models, whereas practitioners build their own alternatives. Our study provides an assessment of the most widely used methods of assessing country risk and shows that practitioners should carefully choose their country risk model. Current models produce a wide range of cost of equity estimates that can considerably affect management decisions. Our case study of reference firms in emerging markets reveals considerable spreads in the models’ estimates of up to 25.6 percentage points for individual firms and 15.4 percentage points on average.