Implied Cost of Equity Capital Estimates as Predictors of Accounting Returns and Stock Returns
University of Notre Dame - Mendoza College of Business
Matthew R. Lyle
Kellogg School of Management
September 21, 2015
This study evaluates popular proxies for expected returns as predictors of accounting and stock returns. From prior research, we show a tautological relation between expected returns, market-to-book, and future return on equity (ROE). Despite this, we find very few commonly-employed implied cost of equity capital (ICC) estimates are positively associated with future ROE after controlling for book-to-market. This weak association with future ROE appears to affect ICC estimates’ ability to forecast future stock returns: we find no evidence that ICC estimates contain incremental information about future stock returns beyond that contained in a linear combination of lagged ROE and book-to-market.
Number of Pages in PDF File: 45
Keywords: cost of capital; expected returns; ROE
JEL Classification: M41, G3
Date posted: December 22, 2013 ; Last revised: September 22, 2015
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