← Search

Journal of Accounting and Economics Vol. 53 No. 3 2012

The implied cost of capital: A new approach

Kewei Hou1,2; Mathijs A. Van Dijk; Yinglei Zhang3

1 The Ohio State University · 2 Fisher College · 3 Chinese University of Hong Kong

open access

Abstract

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.

DOI
10.1016/j.jacceco.2011.12.001
Volume
53
Issue
3
Pages
504-526
Language
en
Sources
bibtex:phds-export.bib openalex crossref

Cite