The implied cost of capital: A new approach
We use earnings forecasts from a cross-sectional model to proxy for cash flow expectations and estimate the implied cost of capital (ICC) for a large sample of firms over 1968-2008. The earnings forecasts generated by the cross-sectional model are superior to analysts' forecasts in terms of coverage, forecast bias, and earnings response coefficient. Moreover, the model-based ICC is a more reliable proxy for expected returns than the ICC based on analysts' forecasts. We present evidence on the cross-sectional relation between firm-level characteristics and ex ante expected returns using the model-based ICC.
|Keywords||Asset pricing tests, Cross-sectional earnings model, Earnings forecasts, Expected returns, Implied cost of capital|
|Persistent URL||dx.doi.org/10.1016/j.jacceco.2011.12.001, hdl.handle.net/1765/32160|
Hou, K., van Dijk, M.A., & Zhang, Y.. (2012). The implied cost of capital: A new approach. Journal of Accounting and Economics, 53(3), 504–526. doi:10.1016/j.jacceco.2011.12.001