18 September 2006/039
Expert panel appointed on estimating cost of capital
The Commerce Commission has named a panel of experts who will advise the Commission on its draft guidelines on
estimating the cost of capital.
The panel will comprise Professor Bradford Cornell, Professor Julian Franks and Dr Martin Lally. Biographical
information on the panel members is attached.
In October 2005 the Commission released for comment Draft Guidelines: The Commerce Commission's Approach to Estimating
the Cost of Capital. This document set out the Commission's present methodology for estimating firms' cost of capital,
which is an important input into most of its regulatory decisions. A total of 23 submissions were received on the Draft
Guidelines.
The submissions raised a broad range of issues which need to be carefully assessed. To this end, and in line with
suggestions made by some submitters, the Commission has appointed the panel of experts to review the Draft Guidelines
and submissions, and provide advice to the Commission.
In providing advice to the Commission, the panel will focus on both the theoretical and practical issues involved in
estimating a firm's cost of capital for regulatory purposes.
It is expected that the panel will provide a report outlining its advice to the Commission by mid-December. The
Commission will consider the advice and formulate its final guidelines on estimating the cost of capital.
The panel's review of the Commission's present cost of capital approach will be conducted independently of any
regulatory proceedings currently before the Commission.
Background
Professor Bradford Cornell: Bradford Cornell is presently a Visiting Professor of Financial Economics at the California
Institute of Technology, and was previously Professor of Finance and Director of the Bank of America Research Center,
Anderson Graduate School of Management, UCLA. He has published over 85 articles in leading economics and finance
journals as well as authored two books on corporate finance. He is presently also a senior consultant with CRA
International, and has advised both regulators and regulated firms in the United States on, among other topics, cost of
capital estimation.
Professor Julian Franks: Julian Franks is Professor of Finance at London Business School. His current research is in the
area of corporate finance and governance, investment, and regulation. His writings have been extensively published in
leading international journals, and he is the co-author of four books on finance. Julian is presently a non-executive
director of Oxford Economic Research Associates (OXERA), and has consulted widely for regulated firms as well as
regulators.
Dr. Martin Lally: Martin Lally is an Associate Professor in the School of Economics and Finance at Victoria University
of Wellington. His research interests include time-varying market leverage, the market risk premium and the cost of
capital, the effect of an asset's market weight on its beta, and optimal dividend policy under dividend imputation.
His work has been published in accounting and finance journals in Australasia and further afield. Martin has consulted
extensively for the Commission, as well as for regulators in Australia, on the topic of cost of capital estimation.
ENDS