Is Capital Asset Pricing Model (CAPM) the best way to estimate cost-of-equity for the lodging industry?

Purpose - The purpose of this paper is to compare traditional methods of estimating the cost-of-equity (capital asset pricing model and Fama and French three-factor model) with a new approach, implied cost-of-equity method, to provide lodging analysts, investors, executives and researchers with a more reliable way to estimate cost-of-equity. Design/methodology/approach - The study uses data from publicly traded lodging firms in the USA that provide all necessary financial data for cost-of-equity estimation. The data range from 1976 to 2005. Findings - The study finds that the price-to-forward earnings (PFE), using the implied cost-of-equity (ICE), approach, estimates cost-of-equity of publicly-traded lodging firms more reliably, compared with CAPM. Practical implications - The study recommends that lodging industry analysts, investors, executives and researchers adopt the ICE approach, especially using the PFE model, to estimate cost-of-equity of publicly-traded lodging firms. Originality/value - The study attempts to provide a more reliable approach to estimate cost-of-equity for publicly-traded lodging firms, specifically compared with the traditional approach, the CAPM.