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What Affects the Implied Cost of Equity Capital?
Dhananjay (Dan) K. Gode New York University - Department of Accounting, Taxation & Business Law Partha Mohanram Columbia University - Department of Accounting February 3, 2001 Stern School of Business Working Paper Abstract: We estimate implied cost of equity capital for a sample of firms from 1984 to 1998 using the Ohlson and Juettner (2000) model that does not make restrictive assumptions about clean surplus and payout policies. We find that cost of equity capital is strongly positively associated with conventional risk factors such as earnings variability, systematic and unsystematic return volatility, and leverage, and is negatively associated with analyst following. These associations are robust to controls for industry membership and to running the regression in changes instead of levels. Our results support the Ohlson-Juettner metric as a robust and appealing measure of cost of equity capital.
Keywords: Cost of capital; Valuation; Ohlson model; Systematic risk; Discount rate; Unsystematic risk; Leverage; Analyst following; Price earnings ratio; PE ratio; Risk growth; Cost of equity capital; Ex-ante cost of capital JEL Classifications: M41, G12, G31, G32 Working Paper SeriesDate posted: February 05, 2001 ; Last revised: April 30, 2008Suggested CitationContact Information
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