Pablo Fernandez and Javier del Campo Survey MRP used in 2010 by Analyst and Companies: IESE Business School May 21, 2010 2,400 answers 1 Market Risk Premium used in 2010 by Analysts and Companies: a survey with 2,400 answers Pablo Fernandez Professor of Corporate Finance. IESE Business School. e-mail: [email protected] Web: http://webprofesores.iese.edu/PabloFernandez// Javier del Campo Research Assistant. IESE Business School. e-mail: [email protected] ------------------------------------------------------------------------------------------ ABSTRACT The average MRP used by analysts in the USA and Canada (5.1%) was similar to the one used by their colleagues in Europe (5.0%), and UK (5.2%). But the average MRP used by companies in the USA and Canada (5.3%) was smaller than the one used by companies in Europe (5.7%), and UK (5.6%). The dispersion of the MRP used was high, but lower than the one of the professors: the average range of MRP used by analysts (companies) for the same country was 5.7% (4.1%) and the average standard deviation was 1.7% (1.2%). These statistics were 7.4% and 2.4% for the professors. Most previous surveys have been interested in the Expected MRP, but this survey asks about the Required MRP. The paper also contains the references that analysts and companies use to justify their MRP, and comments from 89 respondents that illustrate the various interpretations of what is the required MRP. JEL Classification: G12, G31, M21 Keywords: market risk premium; required equity premium; expected equity premium; historical equity premium May 21, 2010 xPpprfA500Pablo Fernandez and Javier del Campo Survey MRP used in 2010 by Analyst and Companies: IESE Business School May 21, 2010 2,400 answers 2 I sent a short email (see exhibit 1) on April 2010 to about 8,500 email addresses of analysts and managers of companies obtained from previous correspondence, papers and webs. I asked about the Market Risk Premium (MRP) “used to calculate the required return to equity” in 2010 and in 2009. I also asked about “Books or articles that I use to support this number”. By May 10, 2010, I had received 2,460 responses: 711 from analysts and 1,749 from other companies1. Of these answers, 601 analysts and 901 companies provided a specific MRP used in 2010. 1. Market Risk Premium (MRP) used in 2010 by analysts Table 1. MRP used by analysts in 2010: 711 answers USA & Canada Europe UK Other Sum Answers reported 107 197 31 266 601 Do not provide a figure: “My MRP changes weekly” or “monthly” 40 31 19 3 93 “It is confidential” 7 8 2 17 Euro: Austria, Belgium, Croatia, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Slovenia, Spain, Sweden and Switzerland Other: Argentina, Australia, Brazil, Chile, China, Colombia, Czech Republic, Dubai, Egypt, Hong Kong, Hungary, India, Indonesia, Iran, Israel, Japan, Kazakhstan, Kuwait, Malaysia, Mexico, New Zealand, Pakistan, Peru, Poland, Qatar, R.Dominicana, Romania, Russia, Saudi Arabia, Singapore, South Africa, South Korea, Sri Lanka, Taiwan, Thailand, Turkey, UA Emirates, Ukraine, Uruguay, Venezuela and Vietnam Table 2 contains the statistics of the MRP used in 2010. It is worth mentioning that the average MRP used by analysts in the USA and Canada (5.1%) was similar to the one used by their colleagues in Europe (5.0%), and UK (5.2%).2. Figure 1 is a graphic representation of the 601 MRPs considered in table 2. Table 2. Market Risk Premium used in 2010 by 601 analysts USA & Canada Euro UK Other Sum Average 5.1 5.0 5.2 6.3 St. dev. 1.1 1.3 1.4 2.2 MAX 10.0 11.9 10.0 25.0 Q3 5.5 5.5 5.7 7.0 Median 5.0 5.0 4.5 5.9 Q1 4.5 4.0 4.0 5.0 min 2.5 3.0 3.5 0.7 MRP used in 2010 Number 104 197 31 269 601 Justify the number*: Own research/calculations 24 70 5 96 195 I do not justify the number / do not answer 33 64 13 55 165 Reference to books or articles 33 40 8 69 150 Historic Data 12 19 3 49 83 Other analysts 2 2 0 3 7 Experience, subjective, own judgement 8 9 1 17 35 * Some respondents provided more than one answer 1 I also received answers from 1,511 professors. I analyse them in the separate document. "Market Risk Premium Used in 2010 by Professors: a Survey with 1,500 Answers": http://ssrn.com/abstract=1606563 2 43 analysts provided a range with an average wide of 0.6%: I considered the medium point of the range.Pablo Fernandez and Javier del Campo Survey MRP used in 2010 by Analyst and Companies: IESE Business School May 21, 2010 2,400 answers 3 Figure 1. Market Risk Premium used in 2010 by 601 analysts MRP 2010 Eur (%)02468101214-2 48 98 148 198MRP 2010 USA (%)024681012140 20 40 60 80 100MRP 2010 UK (%)024681012140 5 10 15 20 25 30MRP 2010 Others (%)024681012140 50 100 150 200 250 2. MRP used by analysts in 2010 and in 2009 514 analysts indicated which MRP they used in 2009. Figure 2 shows the difference between the MRP used in 2010 and the MRP used in 2009 for each one of the respondents 1 32% of the analysts decreased the MRP in 2010 (-1% on average) 2 57% used the same MRP, and 3 11% increased it (1.3% on average). Figure 2. [MRP used in 2010] - [MRP used in 2009] by 601 analysts MRP 2010 - MRP 2009 Eur (%)-8-6-4-2024680 50 100 150MRP 2010 - MRP 2009 USA (%)-8-6-4-2024680 20406080MRP 2010 - MRP 2009 UK (%)-8-6-4-2024680 5 10 15 20 25MRP 2010 - MRP 2009 Others (%)-8-6-4-2024680 50 100 150 Table 3 contains the main statistics of the difference [MRP used in 2010] - [MRP used in 2009].Pablo Fernandez and Javier del Campo Survey MRP used in 2010 by Analyst and Companies: IESE Business School May 21, 2010 2,400 answers 4 Table 3. [MRP used in 2010] - [MRP used in 2009] by analysts USA & Canada Euro UK Other All Average -0,3 0,0 -0,1 -0,3 -0,2 St. dev. 0.7 0.7 0.7 1.1 0.9 MAX 3.0 4.6 1.0 7.0 7.0 Median 0.0 0.0 0.0 0.0 0.0 min -3.9 -3.0 -2.0 -6.0 -6.0 Number 99 189 29 197 514 < 0 36 42 6 82 166 = 0 61 122 19 91 293 MRP used in 2010 - MRP used in 2009 > 0 2 25 4 24 55 3. MRP used by analysts in 2010: a closer look by country Table 4 contains the statistics by country of the MRP used in 2010. We only report statistics for the 22 countries with 5 or more answers. The average MRP used by analysts in the USA (5.12%) was higher than the one used by their colleagues in any European country. Figure 4 is a graphic representation of the results of