The Implied Cost of Equity Capital in the Jordanian Industrial and Service Companies
International Journal of Accounting and Finance Vol. 4, No. 3, 2014, pp. 240- 260
21 Pages Posted: 17 Dec 2013 Last revised: 5 Jul 2017
Date Written: December 3, 2013
This study estimates the implied cost of equity capital of the Jordanian companies listed at the Amman Stock Exchange using the residual income valuation model suggested by Gebhardt, Lee, and Swaminathan (GLS) (2001). The results show that the implied cost of equity capital computed from the GLS approach produces a mean of ex-ante cost of equity capital of 9.6% for the Jordanian companies listed at the ASE. We also examine whether the Jordanian firms’ cost of equity capital, based on the residual income model, is a more reliable measure of cost of equity than the realized stock returns, by investigating the association between the cost of equity capital (or realized returns) and firm-specific risk proxies. We find that the implied cost of equity capital is associated significantly with all risk proxies in the predicted directions, while the realized stock returns show a significant association only with the size of the firms and market beta. We also find that the adjusted R2 of the regression of the implied cost of equity capital on the risk proxies is higher than that of the realized stock returns. We conclude that the implied cost of equity capital derived from the residual income valuation model is a more reliable measure for the ex-ante cost of equity capital than that of the realized stock returns in terms of the association with firm-specific risk proxies.
Keywords: realised stock returns; implied cost of equity capital; residual income model; stock evaluation; risk; Amman Stock Exchange; Jordan
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