Abstract

http://ssrn.com/abstract=1967706
 
 

References (48)



 
 

Citations (1)



 


 



Measurement Errors of Expected Returns Proxies and the Implied Cost of Capital


Charles C. Y. Wang


Harvard Business School

May 21, 2013

Harvard Business School Accounting & Management Unit Working Paper No. 13-098

Abstract:     
This paper presents a methodology to study implied cost of capital's (ICC) measurement errors, which are relatively unstudied empirically despite ICCs' popularity as proxies of expected returns. By applying it to the popular implementation of ICCs of Gebhardt, Lee, and Swaminathan (2001) (GLS), I show that the methodology is useful for explaining the variation in GLS measurement errors. I document the first direct empirical evidence that ICC measurement errors can be persistent, can be associated with firms' risk or growth characteristics, and thus confound regression inferences on expected returns. I also show that GLS measurement errors and the spurious correlations they produce are driven not only by analysts' systematic forecast errors but also by functional form assumptions. This finding suggests that correcting for the former alone is unlikely to fully resolve these measurement-error issues. To make robust inferences on expected returns, ICC regressions should be complemented by realized-returns regressions.

Number of Pages in PDF File: 54

Keywords: Expected returns, implied cost of capital, measurement errors

JEL Classification: D03, G30, O15, P34

working papers series





Download This Paper

Date posted: December 5, 2011 ; Last revised: May 21, 2013

Suggested Citation

Wang, Charles C. Y., Measurement Errors of Expected Returns Proxies and the Implied Cost of Capital (May 21, 2013). Harvard Business School Accounting & Management Unit Working Paper No. 13-098. Available at SSRN: http://ssrn.com/abstract=1967706 or http://dx.doi.org/10.2139/ssrn.1967706

Contact Information

Charles C. Y. Wang (Contact Author)
Harvard Business School ( email )
Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
Feedback to SSRN


Paper statistics
Abstract Views: 2,986
Downloads: 571
Download Rank: 25,840
References:  48
Citations:  1

© 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 0.391 seconds