The Implied Cost of Capital: A New Approach

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212 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 languageEnglish
Pages (from-to)504-526
Number of pages23
JournalJournal of Accounting and Economics
Volume53
Issue number3
DOIs
Publication statusPublished - 2012

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