Implied cost of capital investment strategies: evidence from international stock markets

Florian Esterer () and David Schröder

Annals of Finance, 2014, vol. 10, issue 2, 195 pages

Abstract: Investors can generate excess returns by implementing trading strategies based on publicly available equity analyst forecasts. This paper captures the information provided by analysts by the implied cost of capital (ICC), the internal rate of return that equates a firm’s share price to the present value of analysts’ earnings forecasts. We find that U.S. stocks with a high ICC outperform low ICC stocks on average by 6.0 % per year. This spread is significant when controlling the investment returns for their risk exposure as proxied by standard pricing models. Further analysis across the world’s largest equity markets validates these results. Copyright Springer-Verlag Berlin Heidelberg 2014

Keywords: Analyst forecasts; Implied cost of capital; International equity markets; Market efficiency; G11; G14; G15; M41 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s10436-013-0236-3

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