Estimation of the Cost of Equity in the Turkish Insurance Sector Using the Full Information Beta (FIB) Method: A Comparative Analysis of the CAPM, FF3F, and R-L Models

Öz

This study aims to calculate the cost of equity (COE) for both publicly listed and non-listed insurance companies operating in the Turkish insurance sector. The insurance sector, characterized by its unique risk structure and financial dynamics, requires methodologies beyond traditional COE calculation methods due to its complex nature. This study integrates the Capital Asset Pricing Model (CAPM), Fama-French Three-Factor Model (FF3F), and Rubinstein-Leland (R-L) model using the Full Information Beta (FIB) technique, comparing their abilities to accurately estimate COE. The findings reveal that the R-L model provides lower error rates compared to other models in estimating COE in the complex and heterogeneous environment of the insurance sector. Therefore, the R-L model appears to be a more suitable tool for decision-making regarding capital allocation and risk management in insurance companies. This research offers a significant contribution to the literature by serving as a guide for determining the most appropriate COE estimation model for the insurance sector.

Anahtar Kelimeler

• Insurance Sector
• Cost of Equity (COE)
• Full Information Beta (FIB)
• CAPM
• Fama-French Three-Factor Model (FF3F)
• Rubinstein-Leland (R-L) Model

Türkiye Sigorta Sektöründe Özsermaye Maliyetinin Full Information Beta (FIB) Yöntemi ile Tahmini: CAPM, FF3F ve R-L Modellerinin Karşılaştırmalı Analizi

Öz

Bu çalışma, Türkiye sigorta sektöründe faaliyet gösteren halka açık ve halka açık olmayan tüm sigorta şirketlerinin özsermaye maliyetlerinin (ÖSM) hesaplanmasını amaçlamaktadır. Sigorta sektörü, kendine has risk yapısı ve finansal dinamikleri nedeniyle geleneksel sermaye maliyeti hesaplama yöntemlerinin ötesinde yöntemlere gerek duyan karmaşık bir yapıya sahiptir. Bu çalışma, Full Information Beta (FIB) tekniği kullanılarak, Capital Asset Pricing Model (CAPM), Fama-French Üç Faktör Modeli (FF3F) ve Rubinstein-Leland (R-L) modelini birleştirmekte ve bu modellerin özsermaye maliyetlerini doğru bir şekilde tahmin edebilme kabiliyetlerini karşılaştırmaktadır. Çalışmanın bulguları, R-L modelinin, sigorta sektörü gibi karmaşık ve heterojen yapıya sahip bir sektörde sermaye maliyetini tahmin etmede diğer modellere göre daha düşük hata oranları sunduğunu ortaya koymaktadır. Bu sayede, R-L modelinin sigorta şirketlerinin sermaye tahsisi ve risk yönetimi kararlarında daha uygun bir araç olarak kullanılabileceği sonucuna ulaşılmıştır. Bu çalışma, literatüre önemli bir katkı sunarak, sigorta sektörü için en uygun ÖSM hesaplama modelinin belirlenmesi konusunda rehber niteliği taşımaktadır.

Anahtar Kelimeler

• Sigorta Sektörü
• Özsermaye Maliyeti (ÖSM)
• Full Information Beta (FIB)
• CAPM
• Fama-French Üç Faktör Modeli (FF3F)
• Rubinstein-Leland (R-L) Modeli

Kaynakça

1. Barberis, N., Shleifer, A. & Vishny, R. (1998). A model of investor sentiment. Journal of Financial Economics, 49(3), 307-343.
2. Basu, S. (1977). Investment performance of common stocks in relation to their price-earnings ratios: A test of the efficient market hypothesis. Journal of Finance, 32(3), 663-682.
3. Basu, S. (1981). The relationship between earnings' yield, market value, and return for NYSE common stocks: Further evidence. Journal of Financial Economics, 12(1), 129-156.
4. Bhandari, L. C. (1988). Debt/equity ratio and expected common stock returns: Empirical evidence. Journal of Finance, 43(2), 507-528.
5. Black, F. (1972). Capital market equilibrium with restricted borrowing. Journal of Business, 45(3), 444-455.
6. Chui, A. C. W., Titman, S. & Wei, K. C. J. (2000). Momentum, ownership structure, and financial crises: An analysis of Asian stock markets. Journal of Financial Economics, 58(1-2), 247-273.
7. Cornad, J. & Kaul, G. (1998). An analysis of the behavior of security return volatility. Journal of Business & Economic Statistics, 16(3), 303-314.
8. Cummins, J. D. & Harrington, S. E. (1985). Property-liability insurance rate regulation: Estimation of underwriting betas using firm-specific stock return data. Journal of Risk and Insurance, 52(1), 16-43.

9. Cummins, J. D. & Harrington, S. E. (1988). The relationship between risk and return: Evidence for property-liability insurance stocks. Journal of Risk and Insurance, 55(1), 15-31.
10. Cummins, J. D. & Lamm-Tennant, J. (1994). Capital structure and risk management in property-liability insurance. Journal of Risk and Insurance, 61(4), 621-635.
11. Cummins, J. D. & Phillips, R. D. (2005). Estimating the cost of equity capital for property-liability insurers. Journal of Risk and Insurance, 72(3), 441-478.
12. Cummins, J. D. & Weiss, M. A. (2014). Systemic risk and the U.S. insurance sector. Journal of Risk and Insurance, 81(3), 489-528.
13. Cummins, J. D., Grace, M. F. & Phillips, R. D. (1999). Regulatory solvency prediction in property-liability insurance: Risk-based capital, audit ratios, and cash flow simulation. Journal of Risk and Insurance, 66(3), 417-458.
14. Daske, H. & Gebhardt, G. (2006). International financial reporting standards and experts' perceptions of disclosure quality. Abacus, 42(3-4), 461-498.
15. Easton, P. D. & Sommers, G. A. (2007). Effect of analysts' optimism on estimates of the expected rate of return implied by earnings forecasts. Journal of Accounting Research, 45(5), 983-1015.
16. Fama, E. F. & French, K. R. (1992). The cross-section of expected stock returns. Journal of Finance, 47(2), 427-465.
17. Fama, E. F. & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3-56.
18. Fama, E. F. & French, K. R. (1997). Industry costs of equity. Journal of Financial Economics, 43(2), 153-193.
19. Fama, E. F. & MacBeth, J. D. (1973). Risk, return, and equilibrium: Empirical tests. Journal of Political Economy, 81(3), 607-636.
20. Gode, D. & Mohanram, P. (2003). Inferring the cost of capital using the Ohlson-Juettner model. Review of Accounting Studies, 8(4), 399-431.
21. Hong, H. & Stein, J. C. (1999). A unified theory of underreaction, momentum trading, and overreaction in asset markets. Journal of Finance, 54(6), 2143-2184.
22. Jagadeesh, N. & Titman, S. (1993). Returns to buying winners and selling losers: Implications for stock market efficiency. Journal of Finance, 48(1), 65-91.
23. Jegadeesh, N. & Titman, S. (2001). Profitability of momentum strategies: An evaluation of alternative explanations. Journal of Finance, 56(2), 699-720.
24. Kaplan, P. D. & Peterson, J. D. (1998). Full-information industry betas. Financial Management, 27(2), 85-93.
25. Lee, S. & Cummins, J. D. (1998). Alternative models for estimating the cost of equity capital for property-liability insurers. Journal of Risk and Insurance, 65(2), 223-256.
26. Leland, H. E. (1994). Corporate debt value, bond covenants, and optimal capital structure. Journal of Finance, 49(4), 1213-1252.
27. Lintner, J. (1965). The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. Review of Economics and Statistics, 47(1), 13-37.
28. Markowitz, H. M. (1952). Portfolio selection. Journal of Finance, 7(1), 77-91.
29. Modigliani, F. & Miller, M. H. (1958). The cost of capital, corporation finance, and the theory of investment. American Economic Review, 48(3), 261-297.
30. Rosenberg, B., Reid, K. & Lanstein, R. (1985). Persuasive evidence of market inefficiency. Journal of Portfolio Management, 11(3), 9-16.
31. Rouwenhorst, K. G. (1998). International momentum strategies. Journal of Finance, 53(1), 267-284.
32. Rubinstein, M. (1976). The valuation of uncertain income streams and the pricing of options. Bell Journal of Economics, 7(2), 407-425.
33. Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of Finance, 19(3), 425-442.
34. Upreti, V. (2013). Full-information beta estimation and industry-specific risk: Evidence from the insurance sector. Journal of Financial Research, 36(4), 553-572.
35. Upreti, V., Adams, M. & Jia, G. (2022). Evaluating the cost of equity in non-public firms: The case of insurance companies. Journal of Financial Economics, 145(1), 1-19.
36. Wen, M. M., Wu, T. Y. & Zou, H. (2008). The cost of equity in the property-liability insurance industry. Journal of Risk and Insurance, 75(2), 335-358.