Growth Expectations out of WACC

86 Pages Posted: 29 Jun 2020 Last revised: 16 Apr 2021

Date Written: April 16, 2021

Abstract

We reconcile the empirically flat relation between historical betas and stock returns (flat security market line) with the common usage of the CAPM based on historical betas in valuation. Analysts bias cash flow growth expectations upwards for high-beta firms, so that the value-reducing effect of higher historical systematic risk cancels out and buy/sell-recommendations remain unrelated to beta. The association between beta and growth overestimation is driven by estimates conventionally used in the industry (e.g., Bloomberg betas), suggesting that analysts adjust growth expectations to offset beta's valuation effects, instead of exhibiting a coincidentally higher overoptimism for higher-beta firms.

Keywords: Analysts, Growth expectations, CAPM, Cost of Capital

JEL Classification: G24, D84

Suggested Citation

Jylha, Petri and Ungeheuer, Michael, Growth Expectations out of WACC (April 16, 2021). Available at SSRN: https://ssrn.com/abstract=3618612 or http://dx.doi.org/10.2139/ssrn.3618612

Petri Jylha

Aalto University ( email )

P.O. Box 21220
Aalto, 00076
Finland

Michael Ungeheuer (Contact Author)

Aalto University ( email )

P.O.Box 21210
Aalto, 00076
Finland

HOME PAGE: http://sites.google.com/site/ungeheuermichael/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
188
Abstract Views
1,360
rank
199,975
PlumX Metrics