Abstract

http://ssrn.com/abstract=1561682
 
 

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The Implied Cost of Capital: A New Approach


Kewei Hou


Ohio State University (OSU) - Department of Finance

Mathijs A. Van Dijk


Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM)

Yinglei Zhang


The Chinese University of Hong Kong (CUHK) - School of Accountancy

December 14, 2011

Charles A. Dice Center Working Paper No. 2010-4
Fisher College of Business Working Paper No. 2010-03-004
Journal of Accounting & Economics (JAE), Forthcoming

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.

Number of Pages in PDF File: 53

Keywords: Cross-sectional earnings model, Earnings forecasts, Expected returns, Implied cost of capital, Asset pricing tests

JEL Classification: G12, G14, G29, G31, G32, M40, M41

Accepted Paper Series





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Date posted: March 2, 2010 ; Last revised: December 13, 2011

Suggested Citation

Hou, Kewei and Van Dijk, Mathijs A. and Zhang, Yinglei, The Implied Cost of Capital: A New Approach (December 14, 2011). Charles A. Dice Center Working Paper No. 2010-4; Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: http://ssrn.com/abstract=1561682

Contact Information

Kewei Hou (Contact Author)
Ohio State University (OSU) - Department of Finance ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-0552 (Phone)
614-292-2418 (Fax)

Mathijs A. Van Dijk
Erasmus University - Rotterdam School of Management ( email )
P.O. Box 1738
Rotterdam, 3000 DR
Netherlands
+31 10 408 1124 (Phone)
+31 10 408 9017 (Fax)
HOME PAGE: http://mathijsavandijk.com/
Erasmus Research Institute of Management (ERIM)
P.O. Box 1738
3000 DR Rotterdam
Netherlands
Yinglei Zhang
The Chinese University of Hong Kong (CUHK) - School of Accountancy ( email )
Shatin, N.T.
Hong Kong
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