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The Relationship between Implied Cost of Equity and Corporate Life Cycle Stages

Author

Listed:
  • Attaullah Shah

    (Institute of Management Sciences, Peshawar, Pakistan)

  • Khyber Khan

    (Institute of Management Sciences, Peshawar, Pakistan)

Abstract

In this study, we develop and test a hypothesis that the implied cost of equity declines as a firm passes through the growth, maturity, and stagnant stages of its life. We use the methodology of Anthony and Ramesh (1992) for identifying corporate life cycle stages. Three different models are used to calculate the implied cost of equity: the Easton (2004) model, the Gordon and Gordon (1997) model, and the Ohlson and Juettner-Nauroth (2005) model. For testing our hypothesis, we use data of all non-financial firms listed on the Karachi Stock Exchange from 1996 to 2012. The results lend strong support to our hypothesis in both the univariate and multiple regression analysis. The results show robustness to using different models of implied cost of equity and controlling for well-known determinants of the cost of equity such as beta, idiosyncratic risk, market-to-book ratio, firm size, and leverage.

Suggested Citation

  • Attaullah Shah & Khyber Khan, "undated". "The Relationship between Implied Cost of Equity and Corporate Life Cycle Stages," IMSciences Working Papers 2017-01, Institute of Management Sciences, Peshawar, Pakistan.
    • Handle: RePEc:bec:papers:2017-01
    as

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    More about this item

    Keywords

    Corporate Life Cycle; Implied Cost of Equity; MPEG; Gordon; Ohlson and Juettner-Nauroth; Pakistan.;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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