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Diagnostics to Evaluate Cost of Capital Measures. Discussion of Christodoulou et al

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  • Jeremy Bertomeu

Abstract

type="main"> Christodoulou et al. ( ) develop measures of the cost of equity capital that require only accounting inputs, using as an identification strategy the linear information dynamics of Feltham and Ohlson ( ). I propose to test these measures by evaluating the predictability of innovations to abnormal earnings using various predetermined variables. The over-identifying restrictions of this model require these innovations not to be predictable. Using a generalized model, I observe that the estimated measures are probably too low. I conjecture that this anomaly, which occurs jointly with a positive drift in abnormal earnings, is caused by the omission of economic assets such as intangibles.

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  • Jeremy Bertomeu, 2016. "Diagnostics to Evaluate Cost of Capital Measures. Discussion of Christodoulou et al," Abacus, Accounting Foundation, University of Sydney, vol. 52(1), pages 211-219, March.
    • Handle: RePEc:bla:abacus:v:52:y:2016:i:1:p:211-219
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    References listed on IDEAS

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    1. Stephen H. Penman, 2009. "Accounting for Intangible Assets: There is Also an Income Statement," Abacus, Accounting Foundation, University of Sydney, vol. 45(3), pages 358-371, September.
    2. D. J. Johnstone, 2013. "The CAPM Debate and the Logic and Philosophy of Finance," Abacus, Accounting Foundation, University of Sydney, vol. 49, pages 1-6, January.
    3. Jeremy Bertomeu, 2013. "Discussion of Earnings Manipulation and the Cost of Capital," Journal of Accounting Research, Wiley Blackwell, vol. 51(2), pages 475-493, May.
    4. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-1286, September.
    5. Miller, Merton H & Rock, Kevin, 1985. "Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-1051, September.
    6. Taylor, Daniel J. & Verrecchia, Robert E., 2015. "Delegated trade and the pricing of public and private information," Journal of Accounting and Economics, Elsevier, vol. 60(2), pages 8-32.
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    Cited by:

    1. Yi Jiang & Stewart Jones, 2018. "Corporate distress prediction in China: a machine learning approach," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(4), pages 1063-1109, December.

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