Abstract

http://ssrn.com/abstract=1653940
 
 

References (111)



 
 

Citations (21)



 


 



Evaluating Implied Cost of Capital Estimates


Charles M.C. Lee


Stanford University - Graduate School of Business

Eric C. So


Massachusetts Institute of Technology (MIT) - Sloan School of Management

Charles C. Y. Wang


Harvard Business School

September 7, 2011


Abstract:     
Characterizing a firm’s true (but unobservable) expected returns as the normative benchmark, we develop a two-dimensional framework for evaluating the relative performance of implied cost-of-capital (ICC) estimates. First, in time-series, variations in ICC estimates should reflect changes in true expected returns rather than changes in measurement errors. Second, cross-sectionally, ICC estimates should predict future realized returns. Using this framework, we compare seven alternative ICC measures and show that several perform quite well along both dimensions, and all do much better than Beta-based estimates. In addition, we provide evidence on the importance of appropriate matching between the earnings forecasting method (analyst vs. mechanical) and the valuation model. Overall, our evidence provides significant support for the broader adoption of ICCs as firm-level expected return proxies.

Number of Pages in PDF File: 51

Keywords: Implied Cost of Capital, Expected Returns

JEL Classification: M40, M41, G10, G11, G12

working papers series


Download This Paper

Date posted: August 6, 2010 ; Last revised: September 8, 2011

Suggested Citation

Lee, Charles M.C. and So, Eric C. and Wang, Charles C. Y., Evaluating Implied Cost of Capital Estimates (September 7, 2011). Available at SSRN: http://ssrn.com/abstract=1653940 or http://dx.doi.org/10.2139/ssrn.1653940

Contact Information

Charles M.C. Lee (Contact Author)
Stanford University - Graduate School of Business ( email )
Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States
650-721-1295 (Phone)

Eric C. So
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
77 Massachusetts Ave.
E62-416
Cambridge, MA 02142
United States
Charles C. Y. Wang
Harvard Business School ( email )
Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
Feedback to SSRN


Paper statistics
Abstract Views: 3,874
Downloads: 964
Download Rank: 11,766
References:  111
Citations:  21

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo5 in 0.516 seconds