Future Realized Return, Firm‐Specific Risk and the Implied Expected Return

28 Pages Posted: 15 Mar 2018

Multiple version iconThere are 2 versions of this paper

Date Written: March 2018

Abstract

In this paper, I propose a novel approach to derive a firm‐specific measure of expected return. It builds on recent accounting‐based valuation models developed by Clubb (2013) and Ashton and Wang (2013). The measure is intrinsically linked to commonly used financial ratios, including book‐to‐market, (forward) earnings yield, and dividend‐to‐price, as well as growth and past returns. The empirical evidence shows that it is significantly positively associated with future realized stock returns and also significantly correlated with commonly used risk characteristics in a theoretically predictable manner. The results are likely to be of interest to practitioners and managers in making capital allocation decisions and to academics in need of proxies for firms’ discount rates and expected returns.

Keywords: Earnings forecasts, Firm risk characteristics, Implied cost of capital, Implied risk premium

Suggested Citation

Wang, Pengguo, Future Realized Return, Firm‐Specific Risk and the Implied Expected Return (March 2018). Abacus, Vol. 54, Issue 1, pp. 105-132, 2018, Available at SSRN: https://ssrn.com/abstract=3140844 or http://dx.doi.org/10.1111/abac.12109

Pengguo Wang (Contact Author)

Xfi, University of Exeter ( email )

Streatham Court
Exeter, EX4 4PU
United Kingdom

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