Resolving the Reliance on Fixed Estimation Dates in the Implied Cost of Equity Capital Approach

Kempkes Jan A. () and Wömpener Andreas
Additional contact information
Kempkes Jan A.: University of Duisburg-Essen, Chair of General Business Administration and Management Accounting, Lotharstraße 1, 47057Duisburg, Germany
Wömpener Andreas: University of Duisburg-Essen, Chair of General Business Administration and Management Accounting, Lotharstraße 1, 47057Duisburg, Germany

Journal of Business Valuation and Economic Loss Analysis, 2019, vol. 14, issue 1, 23

Abstract: Our study’s objective is to develop and analyze a dynamic approach for estimating firms’ expected cost of equity capital. We contribute to the literature by enabling the usage of any required estimation date, resolving the major shortcoming of the existing models—their reliance on one fixed estimation date. This paper presents our model and discusses it from the perspective of the extant body of literature. We show that the current state of the art approach in dynamic estimation does not satisfy theoretical and practical demands, and offers scope for significant improvements. We conduct our analysis by specially considering capital market efficiency, the consistent appreciation of cash flows with respect to timing, and straightforward practical implementation for researchers and practitioners. Building on semi-strong capital market efficiency, the analysis reveals further insights into residual income valuation as we demonstrate that any realization of residual income in the course of the year is irrelevant to valuation in the absence of dividend realization. Consequently, assumptions regarding the shape of earnings in the course of the year are also irrelevant to valuation. Additionally, our theoretically founded model conveniently facilitates the undistorted incorporation of different fiscal year-ends in large samples and avoids stale measures of expected cost of equity capital.

Keywords: (Implied) cost of equity capital; capital market efficiency; fixed estimation date; clean surplus accounting (search for similar items in EconPapers)
JEL-codes: G12 G14 G31 M49 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1515/jbvela-2017-0009 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bpj:jbvela:v:14:y:2019:i:1:p:23:n:2

Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/jbvela/html

DOI: 10.1515/jbvela-2017-0009

Access Statistics for this article

Journal of Business Valuation and Economic Loss Analysis is currently edited by Bradley T. Ewing and James J. Hoffman

More articles in Journal of Business Valuation and Economic Loss Analysis from De Gruyter
Bibliographic data for series maintained by Peter Golla ().