Understanding the Information Content of Alternative Cost-of-Equity Proxies

49 Pages Posted: 7 May 2019 Last revised: 7 May 2021

See all articles by Soku Byoun

Soku Byoun

Baylor University

Kai Wu

Central University of Finance and Economics (CUFE) - School of Finance

Date Written: May 6, 2021

Abstract

We examine why the implied cost of capital (ICC) and factor model-based proxies (FMPs) of the cost of equity show opposite association with corporate investment. We find that ICCs are negatively associated with corporate investment by capturing the discount rate news. Such a relationship is pronounced in firms with high private information and external finance dependence. By contrast, FMPs are positively associated with corporate investment by capturing cash flow news, and such a relationship is pronounced in firms with low private information and external finance dependence. Our findings suggest that ICCs and FMPs contain distinctive information content for capital budgeting decisions in different sets of firms.

Keywords: cost of equity; corporate investment; return decomposition

JEL Classification: G31, G32

Suggested Citation

Byoun, Soku and Wu, Kai, Understanding the Information Content of Alternative Cost-of-Equity Proxies (May 6, 2021). Available at SSRN: https://ssrn.com/abstract=3375143 or http://dx.doi.org/10.2139/ssrn.3375143

Soku Byoun

Baylor University ( email )

Department of Finance Insurance & Real Estate
P.O.Box 98004
Waco, TX 76712
254-710-7849 (Phone)

Kai Wu (Contact Author)

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

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