The Implied Cost of Capital: A New Approach

K Hou; Mathijs van Dijk

doi:10.1016/j.jacceco.2011.12.001

The Implied Cost of Capital: A New Approach

K Hou, Mathijs van Dijk

Department of Finance

Research output: Contribution to journal › Article › Academic › peer-review

301 Citations (Scopus)

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.

Original language	English
Pages (from-to)	504-526
Number of pages	23
Journal	Journal of Accounting and Economics
Volume	53
Issue number	3
DOIs	https://doi.org/10.1016/j.jacceco.2011.12.001
Publication status	Published - 2012

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10.1016/j.jacceco.2011.12.001

http://hdl.handle.net/1765/32160

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title = "The Implied Cost of Capital: A New Approach",

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.",

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AB - 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.

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DO - 10.1016/j.jacceco.2011.12.001

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The Implied Cost of Capital: A New Approach

Abstract

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