Inferring the Cost of Capital Using the Ohlson–Juettner Model

Dan Gode () and Partha Mohanram
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Dan Gode: New York University
Partha Mohanram: Columbia University

Review of Accounting Studies, 2003, vol. 8, issue 4, No 1, 399-431

Abstract: Abstract We compare risk premia (RP) inferred using the Ohlson-Juettner (RPOJ) and residual income valuation (RPRIV) models in three ways: (1) correlation with risk factors; (2) correlation with RP estimated by multiplying current realizations of risk factors by coefficients obtained from regressing prior-year RP on prior-year risk factors; and (3) correlation with ex post returns. RPOJ has expected correlations with risk factors, a modest correlation with RP estimated from prior-year regressions, and an economically significant association with ex post returns. RPRIV has generally higher correlations, but regression coefficients are sensitive to whether the industry median ROE is computed with or without loss firms.

Keywords: implied cost of capital; ex-ante cost of capital; risk premium; equity valuation; risk (search for similar items in EconPapers)
Date: 2003
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DOI: 10.1023/A:1027378728141

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