The Impact of the Covid-19 Pandemic on Changes in the Cost of Capital on the U.S. Market

Stanislaw Urbanski, Bartosz Rymkiewicz
European Research Studies Journal, Volume XXVIII, Issue 2, 651-664, 2025
DOI: 10.35808/ersj/4003

Abstract:

Purpose: The authors analyze the impact of extraordinary events, i.e., the Covid-19 pandemic on changes in the investor’s cost of capital in the U.S. market. Design/Methodology/Approach: The cost of capital for 25 Fama-French quintile portfolios formed on book value to market value and on capitalization is estimated. The portfolios are formed from stocks listed on the U.S. market. In order to accurately assess the impact of Covid-19 conditions on changes in the cost of capital the confidence intervals of the estimated values of the cost of capital are determined. The bootstrap method to estimate the confidence interval of the cost of capital is used. Findings: The authors show that Covid-19 had an impact on the value of the cost of capital in U.S. market, but at a relatively low level of significance, about 10%. Practical Implications: Extraordinary events occurring on the global financial market can significantly affect the decisions of investment portfolio managers. These decisions are determined by changes in the cost of capital perceived by investors. Therefore, correctly estimating the cost of capital in relation to changing economic states is of crucial importance in practice. Originality/Value: Common methods of estimating the cost of capital are based on the use of the classic CAPM model. The use of the five-factor Fama-French model allows for taking into account the multidimensional risk vector. The use of the bootstrap method allows for determining the errors of the cost of capital estimated on the basis of available short time series.


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