“It’s not that the data are wrong,” says Roger Grabowski—who, along with David King, first began developing a response to the perceived shortcomings of Ibbotson’s cost of capital measures, in particular, the data’s exclusive reliance on size/stock price information to characterize a company’s risk. “It’s just not designed for what we were using it for.”
After getting “beaten up” too many times in court for not including alternative, accounting-based measures in the determination of an equity risk premium (ERP), Grabowski and King—aided by the Chicago’s Center for Economic Research and based on Standard & Poor’s Compustat database of public company returns—began about five years ago to publish their annual Risk Premium Report. Many analysts now rely on this report to produce more defensible, credible cost of capital measures, particularly for smaller (less than $10 million annual revenues) target companies.
Just-published by Duff and Phelps, LLC, the 2007 Risk Premium Report is now available at BVResources. Its current 5% ERP more closely mirrors future performance than Ibbotson’s 7.1%, and its 25 size-ranked portfolios (compared to Ibbotson’s 10) are defined not only by market capitalization but also by market value of invested capital, average net income/EBITDA, total assets, number of employees, and more. The 2007 Report is the most reliable information going forward—“but I’m not better than anyone else,” Grabowski insists. “I’ve just spent more time with the data.”
To order the new, 2007 edition, click here.