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Risk and Investment in the Global Telecommunications Industry (4)Filed Under: General

Consequently, it is necessary to have good measures of equity risk for managers, planners and investors. The cost of equity is important in valuing new investment opportunities and in evaluating the ongoing performance of established business projects. This is especially true in the new economy IT industry where an understanding of equity risk aids in the examination of the relationship between the IT sector and economic development.

The purpose of this chapter is to calculate the cost of equity for the global telecommunications industry using a sample of 26 firms in 19 countries. The companies in the sample are chosen primarily based on their inclusion in the www.adr.com telecommunications database and having a reasonable length of market data (five years). Quantitative modeling and simulation techniques are used to estimate various risk measures and the associated cost-of-equity values for the telecommunications industry in each country
in the sample. The methodology is similar to that used by Sadorsky (2003) and Sadorsky and Henriques (2003). The risk measures include systematic risk (Brealey and Myers, 2003; Campbell, Lo and Mackinlay, 1997), total risk (Shapiro, 2003), downside risk (Estrada, 2000, 2002; Harvey, 2000; Alexander, 2001), regret (Dembo and Freeman, 2001), and value at risk (JP Morgan/Reuters, 1996). A brief discussion of each of these risk measures is provided. The risk measures are then used to calculate the cost of equity (which is equal to a risk-free rate plus the product of a risk measure and a market risk premium) in the global telecommunications industry for each company in the sample. For each company, the different cost-of-equity values are compared and contrasted. Moreover, a comparison between different cost-of-equity values is made with companies in similar regions of the world.

Taken From : Digital Economy – Impacts, Influences and Challenges