Equity pricing in the forest sector: evidence from North American stock markets

Financial capital is very mobile and the failure to earn the cost of capital can result in capital flight and a considerably altered forest industry. This article seeks to assess the cost of equity capital for the forest sector from a modern finance perspective and test to what extent it has earned the cost of this capital over the period spanning from December 2003 to December 2008. To do so, using time series and cross-sectional methods, the capital asset pricing model and the Fama–French three-factor model were applied to the weekly returns of 45 publicly traded forest sector securities that are listed on North American stock exchanges. The time series results for both the capital asset pricing and Fama–French three-factor models yielded several negative pricing errors, suggesting ex post that many firms in the sector have failed to earn the cost of equity. Furthermore, cross-sectional results show that riskier firms tended to have lower returns. Such findings are unlikely to hold in the long run and could be one of the primary factors driving significant change in the forest sector in the future.