Abstract

http://ssrn.com/abstract=2370686
 


 



Implied Cost of Equity Capital Estimates as Predictors of Accounting Returns and Stock Returns


Stephannie Larocque


University of Notre Dame - Mendoza College of Business

Matthew R. Lyle


Northwestern University - Kellogg School of Management

February 26, 2016


Abstract:     
This study evaluates popular proxies for expected returns as predictors of accounting and stock returns. Prior research finds 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: 46

Keywords: cost of capital; expected returns; ROE

JEL Classification: M41, G3


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Date posted: December 22, 2013 ; Last revised: April 28, 2016

Suggested Citation

Larocque, Stephannie and Lyle, Matthew R., Implied Cost of Equity Capital Estimates as Predictors of Accounting Returns and Stock Returns (February 26, 2016). Available at SSRN: http://ssrn.com/abstract=2370686 or http://dx.doi.org/10.2139/ssrn.2370686

Contact Information

Stephannie A. Larocque (Contact Author)
University of Notre Dame - Mendoza College of Business ( email )
Mendoza College of Business
Notre Dame, IN 46556-5646
United States
Matthew R. Lyle
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
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