Relevance of Country Risk Premium in Cost of Equity Estimation

A common practice in business valuation and the determination of fair rates of return by regulatory agencies is to use the capital asset pricing model (CAPM) with the ad hoc addition of a country risk premium. The present paper documents this practice in the valuation reports required in public acquisition offers available on the CVM (Brazilian Securities and Exchange Commission) website. Multiple linear regression is used with monthly returns for stock shares of 204 firms listed on the BM&FBovespa (Brazilian Stock Exchange). The period covered is from January 2009 to December 2013, and the results indicate that there is a premium for Brazilian risk that is not completely reflected in Ibovespa returns for only 17 securities. Hence, if one uses the local market index when estimating a firm's cost of equity, it would be both redundant and incorrect to add a country risk premium. The paper concludes with a real company example in which the adoption of the conventional approach - with a country risk premium added - would lead to a 17% pricing error.企业估值与监管机构公允收益率确定的通用惯例，是在资本资产定价模型（Capital Asset Pricing Model，CAPM）基础上特设追加国家风险溢价。本文记载了巴西证券交易委员会（Brazilian Securities and Exchange Commission，CVM）官网公开的公开收购要约所需估值报告中的此类实践。研究采用多元线性回归方法，对巴西证券交易所（BM&FBovespa）上市的204家公司的股票月度收益率展开分析。样本覆盖周期为2009年1月至2013年12月，结果显示，仅有17只证券对应的巴西风险溢价未完全体现在圣保罗证交所综合指数（Ibovespa）的收益率中。因此，若在估算企业股权资本成本时使用本地市场指数，额外追加国家风险溢价既冗余且失当。本文最后以真实企业案例演示：若采用附加国家风险溢价的常规估值方法，将产生17%的定价误差。