Return, Risk and Cost of Equity for Stock S&L Firms: Theory and Empirical Results

This study examines the current deregulated environment for and the financial position of savings and loan associations. It is argued that in a less regulated, more competitive environment managers of savings and loan associations will have to become more proficient in using financial management techniques to assure the survival and the return to profitability of their associations. One aspect of financial management is a more careful estimation of and use of the cost of equity capital, especially for the increasing number of associations that have converted from mutual to stock organizations. Different approaches to the estimation of the cost of equity capital are discussed and monthly stock prices of 35 stock savings and loan associations are used to estimate representative costs of equity capital.