Importance Due to the importance of accounting for company-specific risks at the rate of required return on equity and availability of only subjective approaches to their quantitative evaluation (based on professional judgment), the problem of developing an objective approach to company-specific risk premium (CSRP) evaluation is extremely relevant. Objectives The study aims to identify a set of key factors being the drivers of final CSRP, to reveal the indicators of company performance, signaling about the level of specific risk associated with each factor. Methods Based on the analysis of existing research, I identify the key factors of company-specific risks. Using econometric techniques, I analyze potential indicators of these risks under emerging capital markets. Results I reviewed sources (factors) of company-specific risk formation on the whole. On the basis of real data, I revealed significant company-specific risk factors and corresponding indicators of operational and financial performance acting as indicators of specific risk levels, i.e. current ratio, revenue growth rate, accounts payable turnover ratio and the ratio of debt to equity (D/E). Conclusions and Relevance Operational and financial stability of a company are the key factors of CSRP formation on both emerging and developed capital markets. The findings will contribute to the development of an adequate objective approach to quantitative CSRP evaluation when estimating the required rate of return on equity of a company on emerging markets.
Keywords: unsystematic risk, specific risk, company-specific risk, risk premium
References:
Reilly R. Business Appraiser Considerations to Measure the Company-Specific Risk Premium. Business Appraisal Practice, Spring 2007.
Brealey R.A., Myers S.C., Allen F. Principles of Corporate Finance. 9th ed. McGraw-Hill, 2007, 1043 p.
Delaware Open MRI Radiology Associates v. Kessler et al., Court of Chancery of the State of Delaware Model. Available at: Link.
Helfenstein S. Revisiting Total Beta. Business Valuation Review, 2009, vol. 28, 23 p.
Trugman G.R. Understanding Business Valuation: A Practical Guide to Valuing Small To Medium-Sized Businesses. 2nd ed. New York, American Institute of Certified Public Accountants (AICPA), 2002, 1146 p.
Miller W.D. Assessing Unsystematic Risk: Part I, II, III. CPA Expert, 1999, vol. 5, no. 3, 2000, vol. 6, no. 1, 2001, vol. 6, no. 3.
Porter M.E. The Five Competitive Forces that Shape Strategy. Harvard Business Review, 2008, vol. 86, no. 1, pp. 78–93.
Porter M.E. Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York, Free Press, 1998, 397 p.
Butler P., Pinkerton K. Company-Specific Risk – A Different Paradigm: A New Benchmark. Business Valuation Review, 2006, no. 25, pp. 22–28.
Butler P., Pinkerton K. Company-Specific Risk: The Dow 30 v. Private Company USA. The Value Examiner, 2007. September/October, pp. 12–15.
Butler P., Pinkerton K. Quantifying Company-Specific Risk: The Authors Answer to Your Questions. Business Valuation Update, 2007, May, pp. 9–14.
Butler P., Pinkerton K. Quantifying Company-Specific Risk: A New, Empirical Framework with Practical Applications. Business Valuation Update, 2007, vol. 13, no. 2. Available at: Link.
CFA Institute. CFA Program Curriculum. Financial Reporting and Analysis. Level 1, vol. 3, Wiley, 2013.
Damodaran A. The Dark Side of Valuation: Valuing Young, Distressed and Complex Businesses. New York, FT/Prentice-Hall, 2009, 600 p.
Damodaran A. Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. John Wiley & Sons, 2012, 992 p.
Reinganum M. Abnormal Returns in Small Firm Portfolios. Financial Analysts Journal, 1981, March–April. Available at: Link.
Brown P., Kleidon A., Marsh T. New Evidence on the Nature of Size-Related Anomalies in Stock Prices. Journal of Financial Economics, 1983, vol. 12, iss. 1, pp. 33–56.
