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

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  • David Schröder

    (University of London)

Abstract

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 market efficiency. A key methodological contribution of this paper is to assess the quality of the ICC as estimate of expected returns by evaluating its forecast error for subsequent stock returns. The results show that the accuracy of the ICC as measure of expected stock returns is positively associated with the countries’ level of market efficiency.

Suggested Citation

  • David Schröder, 2020. "The role of market efficiency on implied cost of capital estimates: an international perspective," Annals of Finance, Springer, vol. 16(4), pages 463-499, December.
    • Handle: RePEc:kap:annfin:v:16:y:2020:i:4:d:10.1007_s10436-020-00374-0
    DOI: 10.1007/s10436-020-00374-0
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    More about this item

    Keywords

    Implied cost of capital; Expected stock returns; Market efficiency; Analyst forecasts; Mispricing; Cross-country study;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • K00 - Law and Economics - - General - - - General (including Data Sources and Description)
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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