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

The Journal of Financial Reporting (Forthcoming)

Posted: 29 Jul 2017

Date Written: July 2017

Abstract

The expected rate of equity returns is a central input into various managerial and investment decisions that affect the allocation of scarce resources. Research on capital markets has devoted significant effort to studying how and why expected returns vary over time and across firms. Cochrane (2011) called these questions the central organizing agenda in contemporary asset-pricing research.

At the heart of this research agenda lies a longstanding measurement problem: ex-ante expected returns are unobservable and ex-post realized returns are noisy proxies (Campbell, 1991; Vuolteenaho, 2002). Since Botosan (1997), the accounting literature offered a promising solution to this measurement problem: the development of a novel class of expected-return proxies (ERPs), collectively known as the implied cost of equity capital (ICC).

Suggested Citation

Wang, Charles C. Y., Commentary on Implied Cost of Equity Capital Estimates as Predictors of Accounting Returns and Stock Returns (July 2017). The Journal of Financial Reporting (Forthcoming). Available at SSRN: https://ssrn.com/abstract=3009418

Charles C. Y. Wang (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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