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The implied cost of capital: A new approach

Listed author(s):
  • Hou, Kewei
  • van Dijk, Mathijs A.
  • Zhang, Yinglei

We use earnings forecasts from a cross-sectional model to proxy for cash flow expectations and estimate the implied cost of capital (ICC) for a large sample of firms over 1968–2008. The earnings forecasts generated by the cross-sectional model are superior to analysts' forecasts in terms of coverage, forecast bias, and earnings response coefficient. Moreover, the model-based ICC is a more reliable proxy for expected returns than the ICC based on analysts' forecasts. We present evidence on the cross-sectional relation between firm-level characteristics and ex ante expected returns using the model-based ICC.

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File URL: http://www.sciencedirect.com/science/article/pii/S0165410111000966
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Article provided by Elsevier in its journal Journal of Accounting and Economics.

Volume (Year): 53 (2012)
Issue (Month): 3 ()
Pages: 504-526

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Handle: RePEc:eee:jaecon:v:53:y:2012:i:3:p:504-526
DOI: 10.1016/j.jacceco.2011.12.001
Contact details of provider: Web page: http://www.elsevier.com/locate/jae

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