Investment-based Costs of Equity

Yicheng Liu, Chen Xue and Lu Zhang

No 35040, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The q5-characteristics model estimates costs of equity as Lewellen’s (2015) out-of-sample forecasts from cross-sectional regressions. The q5-cost of equity is competitive in evaluation tests, outperforming the accounting implied cost of equity in predicting cross-sectional returns. The q5-cost of equity is precise at the industry level and aligned with average factor premiums. Its firm-level distribution is weakly left-skewed, whereas the accounting implied cost of equity is right-skewed. However, the accounting cost of equity outperforms in the time series. Factor models perform poorly in out-of-sample tests. Gradient-boosted trees improve on cross-sectional regressions, but not reliably.

JEL-codes: G11 G12 G17 G31 (search for similar items in EconPapers)
Date: 2026-04
Note: AP CF
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