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...

As the proxy for expected return, the implied cost of capital (ICC) is subject to a mispricing-driven measurement error. For undervalued stocks, the mispricing-driven measurement error is positive and increases with the degree of undervaluation while for overvalued stocks, the mispricing-driven...

Contrary to the financial distress premium notion, the stocks of financially distressed firms comove least. Financially distressed firms are characterized by high valuation uncertainty and information and arbitrage frictions. Therefore, their stocks are prone to mispricing and their stock price...

The stocks of firms with poor accounting information quality (AIQ) comove least, as gauged by the correlation between returns on two stocks. Only undiversifiable risk is rewarded with a premium and the undiversifiable risk of a diversified stock portfolio increases with correlations between the...