The implied cost of capital: A new approach

Kewei Hou, Mathijs van Dijk () and Yinglei Zhang

Journal of Accounting and Economics, 2012, vol. 53, issue 3, 504-526

Abstract: 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: Cross-sectional earnings model; Earnings forecasts; Expected returns; Implied cost of capital; Asset pricing tests (search for similar items in EconPapers)
JEL-codes: G12 G14 G29 G31 G32 M40 M41 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (166)

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Working Paper: The Implied Cost of Capital: A New Approach (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:53:y:2012:i:3:p:504-526

DOI: 10.1016/j.jacceco.2011.12.001

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