On the relation between expected returns and implied cost of capital

John Hughes (), Jing Liu () and Jun Liu ()
Additional contact information
John Hughes: University of California Los Angeles
Jing Liu: University of California Los Angeles
Jun Liu: University of California San Diego

Review of Accounting Studies, 2009, vol. 14, issue 2, No 4, 246-259

Abstract: Abstract We examine the relation between implied cost of capital and expected returns under an assumption that expected returns are stochastic, a property supported by theory and empirical evidence. We demonstrate that implied cost of capital differs from expected return, on average, by a function encompassing volatilities of, as well as correlation between, expected returns and cash flows, growth in cash flows, and leverage. These results provide alternative explanations for findings from empirical studies employing implied cost of capital on the magnitude of the market risk premium; predictability of future returns; and the relations between cost of capital and a host of firm characteristics, such as growth, leverage, idiosyncratic risk and the firm’s information environment.

Keywords: Expected return; Implied cost of capital; Weighted average cost of capital; G12; G14; M41 (search for similar items in EconPapers)
Date: 2009
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11142-009-9093-8 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

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:spr:reaccs:v:14:y:2009:i:2:d:10.1007_s11142-009-9093-8

Ordering information: This journal article can be ordered from
http://www.springer.com/accounting/journal/11142

DOI: 10.1007/s11142-009-9093-8

Access Statistics for this article

Review of Accounting Studies is currently edited by Paul Fischer

More articles in Review of Accounting Studies from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().