Home  Journals  Financial Analytics: Science and Experience  34(316) - 2016 September

Assessment of the company-specific risk premium in estimating the required return on equity

Vol. 9, Iss. 34, SEPTEMBER 2016

Article PDF Version

Received: 5 July 2016

Received in revised form: 29 August 2016

Accepted: 10 September 2016

Available online: 22 September 2016

Subject Heading: RISK, ANALYSIS AND EVALUATION

JEL Classification: G11, G12, G14, G15, G32, G34

Pages: 36-49

Importance The rate of return on equity is often incorrectly estimated not only due to technical errors, but also due to biased assessment of company-specific risks, or even their neglect. Therefore it is very important to find an approach to assess idiosyncratic risks of public and closed companies on an unbiased basis.
Objectives The research identifies the advantages and restrictions of the existing approaches to assessing the specific risk premium and devise the respective approach.
Methods The approach relies upon analysis of foreign theoretical and practical researches into company-specific risks and assessment of various types of idiosyncratic risk premiums.
Results Having studied issues of applying assessment and evaluation methods for estimating company-specific risk premiums, we determined advantages and restrictions of those approaches. As a result, we devised an approach to estimating the premium for various types of specific risks, which allows for more objective assessment of risks associated with public and closed companies. The approach is applicable in the advanced and emerging capital market.
Conclusions and Relevance The proposed approach allows assessing premiums for principal types of corporate risks. Consequently, the resulting estimate of corporate value is adequate. The findings will help analysts adequately estimate the required return on equity, considering all population of risks associated with the company.

Keywords: idiosyncratic risk, premium, company, specific risk

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