Journal of Financial and Quantitative Analysis Vol. 60 No. 7 2025

The Cost of Equity: Evidence from Investment Banking Valuations

Gregory W. Eaton¹; Feng Guo²; Tingting Liu³; Danni Tu⁴

¹ University of Georgia · ² Iowa State University · ³ University of Tennessee · ⁴ Southern Illinois University Carbondale

Abstract

Using manually compiled cost of equity (COE) estimates disclosed in takeover regulatory filings, we provide novel evidence on how investment bankers estimate discount rates. COE estimates are related to several risk proxies, such as beta and size. Other firm characteristics are unrelated to COE estimates or provide relations contradicting academic evidence. We also explore the role of incentives. For example, banks use significantly higher COEs in management buyouts, which potentially underestimates target value, making the bid more attractive for target shareholder approval.

DOI

10.1017/s0022109024000851

Volume

60

Issue

7

Pages

3228-3266

Language

en

Sources

crossref openalex

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓