Growth expectations out of WACC: An international view

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master_Nikko_Tobias_2024.pdf (1.02 MB)

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School of Business | Master's thesis
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Date

2024

Department

Rahoituksen laitos

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Mcode

Degree programme

Finance

Language

en

Pages

61

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Abstract

I extend the findings of Jylhä and Ungeheuer (2021) from the US markets to an international context, reconciling the empirically flat security market line with the common usage of the CAPM by equity analysts in valuing firms. Equity analysts seem to adjust their growth estimates to undo the bias caused in discount rates from using historical betas to value firms, so that no positive relationship remains between beta and expected returns or buy/sell recommendations. The relationship between beta and growth estimation is especially driven by the noise component of beta (Welch, 2019) suggesting that analysts offset beta’s valuation effects rather than having coincidental overoptimism for high-beta stocks.

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Thesis advisor

Keloharju, Matti

Keywords

analysts, growth expectations, CAPM, cost of capital

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https://urn.fi/URN:NBN:fi:aalto-202411177147

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[gradu] Kauppakorkeakoulu / BIZ