Accounting-Based Risk Measurement - Evidence for the German Market

I implement the accounting-based risk measurement approach in equity valuation proposed by Nekrasov and Shroff (2009) for the German market using monthly data from 2002 to 2019. The empirical analysis shows that value estimates based on this risk measurement approach produce a significantly smaller valuation inaccuracy relative to the market-based approach for the CDAX constituents. In addition, the explanatory power of the variation in securities prices is larger for the intrinsic value estimate based on the accounting approach. Additionally, the estimated risk can be transformed to obtain accounting-based cost of equity. In contrast to the cost of equity produced by the CAPM, a significant positive correlation with the implied cost of capital can be observed. I conclude and highlight that accounting information is useful for equity investors