Is Capital Asset Pricing Model (CAPM) the best way to estimate cost‐of‐equity for the lodging industry?

Abstract

Purpose

The purpose of this paper is to compare traditional methods of estimating the cost‐of‐equity (capital asset pricing model and Fama and French three‐factor model) with a new approach, implied cost‐of‐equity method, to provide lodging analysts, investors, executives and researchers with a more reliable way to estimate cost‐of‐equity.

Design/methodology/approach

The study uses data from publicly traded lodging firms in the USA that provide all necessary financial data for cost‐of‐equity estimation. The data range from 1976 to 2005.

Findings

The study finds that the price‐to‐forward earnings (PFE), using the implied cost‐of‐equity (ICE), approach, estimates cost‐of‐equity of publicly‐traded lodging firms more reliably, compared with CAPM.

Practical implications

The study recommends that lodging industry analysts, investors, executives and researchers adopt the ICE approach, especially using the PFE model, to estimate cost‐of‐equity of publicly‐traded lodging firms.

Originality/value

The study attempts to provide a more reliable approach to estimate cost‐of‐equity for publicly‐traded lodging firms, specifically compared with the traditional approach, the CAPM.

Citation

Lee, S. and Upneja, A. (2008), "Is Capital Asset Pricing Model (CAPM) the best way to estimate cost‐of‐equity for the lodging industry?", International Journal of Contemporary Hospitality Management, Vol. 20 No. 2, pp. 172-185. https://doi.org/10.1108/09596110810852159