Need evidence that ERP requires analyst judgment? Here it is


A hat tip to Ron Seigneur (Seigneur Gustafson) for letting us know Pablo Fernandez(IESE Business School, Madrid, Spain) has collected recommendations on the equity premium from 150 corporate finance and valuation textbooks published between 1979 and 2009 by authors such as Brealey, Myers, Copeland, Damodaran, Merton, Ross, Bruner, Bodie, and Arzac. In his updated article, “Equity Premium in 150 Textbooks,” Fernandez found “that their recommendations regarding the equity premium range from 3% to 10%, and that 51 books use different equity premia in various pages. The 5-year moving average has declined from 8.4% in 1990 to 5.7% in 2008 and 2009.”

For more of his articles see:

The works of Prof. Fernandez are but one part of the expanding puzzle regarding the equity risk premium and its quantifying methods, Seigneur notes. Surveys should also never serve as the sole proxy for more traditional empirical evidence in rate development models, such as the Private Company Cost of Capital construct developed by Slee and Paglia. Both survey databases provide a great basis for sanity checks, but should not be used as direct inputs.


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