Diagnostics to Evaluate Cost of Capital Measures. Discussion of Christodoulou Et Al

9 Pages Posted: 20 Apr 2016

See all articles by Jeremy Bertomeu

Jeremy Bertomeu

University of California, San Diego (UCSD) - Rady School of Management

Date Written: March 2016

Abstract

Christodoulou et al. ([Christodoulou, D., 2016]) develop measures of the cost of equity capital that require only accounting inputs, using as an identification strategy the linear information dynamics of Feltham and Ohlson ([Feltham, G. A., 1995]). I propose to test these measures by evaluating the predictability of innovations to abnormal earnings using various predetermined variables. The over‐identifying restrictions of this model require these innovations not to be predictable. Using a generalized model, I observe that the estimated measures are probably too low. I conjecture that this anomaly, which occurs jointly with a positive drift in abnormal earnings, is caused by the omission of economic assets such as intangibles.

Keywords: Cost of capital, Expected returns, Structural equations

Suggested Citation

Bertomeu, Jeremy, Diagnostics to Evaluate Cost of Capital Measures. Discussion of Christodoulou Et Al (March 2016). Abacus, Vol. 52, Issue 1, pp. 211-219, 2016. Available at SSRN: https://ssrn.com/abstract=2767223 or http://dx.doi.org/10.1111/abac.12074

Jeremy Bertomeu (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

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