The Implied Cost of Capital: A New Approach

By Kewei Hou, M. V. Dijk, Yinglei Zhang. 2012

529 citations recorded by the source corpus.

We use earnings forecasts from a cross-sectional model to proxy for cash flow expectations and estimate the implied cost of capital (ICC) for a large sample of firms over 1968–2008. The earnings forecasts generated by the cross-sectional model are superior to analysts' forecasts in terms of coverage, forecast bias, and earnings response coefficient. Moreover, the model-based ICC is a more reliable proxy for expected returns than the ICC based on analysts' forecasts. We present evidence on the cross-sectional relation between firm-level characteristics and ex ante expected returns using the model-based ICC.

Subfields: Accounting, Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/6a917e45fc5f41208f13c2b548345d48f65a5024

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Accounting

1. Jimmy Lee
2. C. Lim
3. Beng Wee Goh
4. Terry Shevlin
5. Stanimir Markov
6. T. C. Green
7. Musa Subasi
8. Russell Jame

In Finance

1. Terry Shevlin
2. C. Lim
3. Stanimir Markov
4. Jimmy Lee
5. T. C. Green
6. Beng Wee Goh
7. Musa Subasi
8. Russell Jame

In Strategy and Management

1. Terry Shevlin
2. C. Lim
3. Stanimir Markov
4. Jimmy Lee
5. T. C. Green
6. Beng Wee Goh
7. Musa Subasi
8. Russell Jame

Citations in the corpus

• Analysts’ Forecasts and Asset Pricing: A Survey (2016, unknown): “…the predictable and recurring nature of analysts’ biases discussed in Sections 2 and 3, prior research attempts to refine ICCs as a proxy of expected returns by removing predictable biases in analysts’ forecasts (e.g., Easton and Monahan (2005), Easton (2009), Hou et al. (2012), Larocque (2013)).”
• Cooking the books : recipes and costs of falsified financial statements in China (2011, unknown): “However, this approach has been criticized as the forecasts may be biased and therefore do not accurately reflect the market’s expectations (Easton, 2006; Easton and Sommers, 2007; Easton 2009; Hou et al., 2010).”
• The effect of corporate tax avoidance on the cost of equity (2013, methodology): “In an additional robustness test, we re-estimate our cost of equity measure (R_PEG) using inputs from the cross-sectional model following Hou et al. (2012).”
• Policy uncertainty, investment, and the cost of capital (2018, unknown): “11 More specifically, following prior literature (Hail and Leuz, 2006; Chen et al., 2011; Hou et al., 2012; Barth et al., 2013), we calculate KEquity as the arithmetic average of the ICC measures of Claus and Thomas (2001; KCT), Ohlson and JuettnerNauroth (2005; KOJN), Easton (2004; KMPEG), and Gebh”
• Linear valuation without OLS: the Theil-Sen estimation approach (2014, unknown): “The relevant literature is long, with the latest installments due to Gerakos and Gramacy (2013), Hou et al. (2012), and Li and Mohanram (2014), among others.”