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What Affects the Implied Cost of Equity Capital?

Stern School of Business Working Paper

32 Pages Posted: 5 Feb 2001  

Dhananjay (Dan) K. Gode

New York University (NYU) - Department of Accounting

Partha S. Mohanram

University of Toronto - Rotman School of Management

Date Written: February 3, 2001

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 Classification: M41, G12, G31, G32

Suggested Citation

Gode, Dhananjay (Dan) K. and Mohanram, Partha S., What Affects the Implied Cost of Equity Capital? (February 3, 2001). Stern School of Business Working Paper. Available at SSRN: https://ssrn.com/abstract=258702 or http://dx.doi.org/10.2139/ssrn.258702

Dhananjay (Dan) K. Gode (Contact Author)

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street
Suite 10-180
New York, NY 10012
United States
212-998-0021 (Phone)
212-995-4004 (Fax)

Partha S. Mohanram

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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