The implied cost of capital: accounting for growth

Stephen Penman (), Julie Zhu () and Haofei Wang ()
Additional contact information
Stephen Penman: Columbia University
Julie Zhu: Fudan Fanhai School of Business
Haofei Wang: Shanghai Jiao Tong University

Review of Quantitative Finance and Accounting, 2023, vol. 61, issue 3, No 8, 1029-1056

Abstract: Abstract This paper involves a critique of the Implied Cost of Capital (ICC) that leads to an alternative measure which, like the ICC, is extracted from accounting data. The critique deals with how the ICC handles the accounting involved. First, the ICC fails an accounting consistency condition. Second, expected earnings growth conveys risk and return, but this is not recognized when a growth rate is inserted in the reverse engineering exercise. Empirical tests so confirm. An alternative accounting-based measure accommodates these points and validates on criteria indicating risk and return. The resulting measure is a yield to maturity for equities, much like that for a bond.

Keywords: Implied cost of capital; Earnings growth and risk; Yield to maturity (search for similar items in EconPapers)
JEL-codes: G11 G12 M41 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11156-023-01175-y

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