Estimating An Implied Cost of Capital for Australian Firms

36 Pages Posted: 10 Apr 2019

See all articles by Alex Paton

Alex Paton

Citigroup, Inc. - Citigroup - Sydney

Damien Cannavan

Financial Research Network (FIRN)

Stephen Gray

University of Queensland - Business School; Duke University - Fuqua School of Business; Financial Research Network (FIRN)

Khoa T.A. Hoang

University of Queensland - Business School

Date Written: March 25, 2019

Abstract

We find that a composite implied cost of capital (ICC) estimate - based on the earnings forecasts generated by cross-sectional models is highly correlated with future realised returns in both portfolio- and regression-based tests. By contrast, we find very little evidence for an association with future realised returns for an ICC estimate based on analyst earnings forecasts. We also document the time-varying nature of expected returns and risk premia, and provide up-to-date estimates of an implied Australian market risk premium. Additionally, we provide industry-level estimates; highlighting differences in expected returns and risk perceptions across sectors.

Keywords: cost of capital, earnings estimates, analyst forecasts

JEL Classification: G12, G14

Suggested Citation

Paton, Alexander and Cannavan, Damien and Gray, Stephen and Hoang, Khoa T.A., Estimating An Implied Cost of Capital for Australian Firms (March 25, 2019). Available at SSRN: https://ssrn.com/abstract=3364004 or http://dx.doi.org/10.2139/ssrn.3364004

Alexander Paton

Citigroup, Inc. - Citigroup - Sydney ( email )

Level 40
Citigroup Centre 2 Park Street
Sydney NSW 2000
Australia

Damien Cannavan

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Stephen Gray

University of Queensland - Business School ( email )

University of Queensland
Brisbane, Queensland 4072
Australia

Duke University - Fuqua School of Business

Box 90120
Durham, NC 27708-0120
United States

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Khoa T.A. Hoang (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

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