The cost of equity estimation in emerging Europe: the case of Bulgarian REITs

Purpose – The International Valuations Standards Committee adopts the Capital Asset Pricing Model as a method for estimation of the cost of equity. It has several drawbacks and appraisers in emerging markets need more useful model for cost of equity estimation. The paper aims to discuss these issues. Design/methodology/approach – The proposed model is a modification of the Salomon Smith Barney model for cost of capital determination. The econometric part of the model incorporates the non-synchronous effect, the thin trading effect, the time varying risk nature, and the systematic country risk. Findings – The model estimates the cost of equity of Bulgarian REITs more accurate than the one, who uses the traditional β estimation. Practical implications – The study provides appraisers, business consultants, and investment bankers with a consistent model for cost of equity estimation. The model incorporates most of the features of emerging markets REITs return series and avoids the weaknesses of the single-factor model for cost of equity estimation in emerging markets. Originality/value – The proposed model reflects the following characteristics: the degree of diversification of the particular investor (imperfectly diversified); country risk; and time-varying risk nature. The political risk is incorporated by more objective measure of the systematic country risk.