A Review of the Literature on Methods of Computing the Implied Cost of Capital

In this paper we critically review the existing literature on methods of computing the implied cost of capital (ICC). The ICC literature is characterised by a large number of heterogeneous studies reflecting different approaches, models to assess their validity and methods to mitigate potential biases. However, so far there is neither consensus on which ICC approach performs best, how shortcomings can be mitigated effectively, nor how methods can be evaluated adequately. We systematically categorise the various approaches available in the literature, extract assumptions underlying the models, and discuss the empirical results as well as limitations against this background. In doing so, we are able to show what can reasonably be deduced from existing research and what is still unclear, thereby opening up areas for future research