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Implied Cost of Capital versus Fundamental Valuation Efficiency : A Clarification and Empirical Implications

Cheng, C.S. Agnes - 2019

As the proxy for expected return, the implied cost of capital (ICC) is subject to a mispricing-driven measurement error because the price of a stock used to compute ICC can deviate from its intrinsic value. For undervalued stocks, the mispricing-driven measurement error is positive and increases...

Persistent link: https://www.econbiz.de/10012901012

Speculative Stock Price and Inadequacy of the Implied Cost of Capital as a Proxy for Expected Return

Fong, Robert - 2020

The implied cost of capital (ICC), the internal rate of return that equates speculative stock price to discounted expected future dividends, includes a mispricing-driven component in addition to expected return. The estimated relation of a mispricing-associated factor (X) with ICC is thus a...

Persistent link: https://www.econbiz.de/10012839261

Income Smoothing, Information Uncertainty, Stock Returns, and Cost of Equity

Chen, Linda H. - 2018

This paper examines the effect of income smoothing on information uncertainty, stock returns, and cost of equity. I show that income smoothing through both total accruals and discretionary accruals tends to reduce firms' information uncertainty, as measured by stock return volatility, analyst...

Persistent link: https://www.econbiz.de/10012938674

Accounting-Based Downside Risk, Cost of Capital, and the Macroeconomy

Konchitchki, Yaniv - 2015

We hypothesize that earnings downside risk, capturing the expectation for future downward operating performance, contains distinct information about firm risk and varies with cost of capital in the cross section of firms. Consistent with the validity of the earnings downside risk measure, we...

Persistent link: https://www.econbiz.de/10013020544

The role of market efficiency on implied cost of capital estimates : an international perspective

Schröder, David - 2020

This study examines the role of market efficiency on international differences in the usefulness of the implied cost of capital (ICC) to measure expected stock returns. The analysis exploits cross-country differences in market efficiency around the world using a variety of empirical measures of...

Persistent link: https://www.econbiz.de/10012852872

International Cost of Capital Estimation : The No-Arbitrage Method

McLelland, Malcolm - 2018

This study summarizes problems associated with existing international cost of capital (ICC) estimation methods; adapts … long-existing arbitrage pricing methods to ICC estimation to a setting where ICC is to be estimated for a privately …-held asset not traded in the capital markets; and then presents a semi-realistic example of ICC estimation for such non …

Persistent link: https://www.econbiz.de/10012919805

Cost of capital dynamics implied by firm fundamentals

Lyle, Matthew; Wang, Charles C. Y. - 2012

We provide a tractable model of firm-level expected holding period returns using two firm fundamentals ― book-to-market ratio and ROE ― and study the cross-sectional properties of the model-implied expected returns. We find that: 1) firm level expected returns and expected profitability are...

Persistent link: https://www.econbiz.de/10009678192

Estimating the Cost of Capital with Basis Assets

Brown, Stephen J. - 2012

We introduce a technology that estimates basis assets and thus the cost of capital. The generalized basis assets technology groups firms together into homogeneous risk classes which share the same systematic risk and therefore the same, commensurate, systematic return. By knowing a firm's risk...

Persistent link: https://www.econbiz.de/10013113269

Noise and Deficiency of the Implied Cost of Capital as an Expected Return Proxy

Cheng, Agnes; Fang, Jing - 2022

Because stock price generally deviates from the intrinsic value, stock price is a noisy indicator of the intrinsic value. As an expected return proxy, the implied cost of capital (ICC)—the internal rate of return that equates the noisy stock price to discounted expected future dividends—thus...

Persistent link: https://www.econbiz.de/10014361606

Expected stock returns worldwide : a log-linear present-value approach

Chattopadhyay, Akash; Lyle, Matthew R.; Wang, Charley C. Y. - 2018

We provide the first large-scale study of the performance of expected-return proxies (ERPs) internationally. Analyst-forecast-based ICCs are sparsely populated and not robustly associated with future returns. Earnings-model-forecast-based ICCs are well-populated, but are unreliable outside the...

Persistent link: https://www.econbiz.de/10011931329