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Implied cost of capital investment strategies: evidence from international stock markets

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  • Florian Esterer

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  • David Schröder

    ()

Abstract

Investors can generate excess returns by implementing trading strategies based on publicly available equity analyst forecasts. This paper captures the information provided by analysts by the implied cost of capital (ICC), the internal rate of return that equates a firm’s share price to the present value of analysts’ earnings forecasts. We find that U.S. stocks with a high ICC outperform low ICC stocks on average by 6.0 % per year. This spread is significant when controlling the investment returns for their risk exposure as proxied by standard pricing models. Further analysis across the world’s largest equity markets validates these results. Copyright Springer-Verlag Berlin Heidelberg 2014

Suggested Citation

  • Florian Esterer & David Schröder, 2014. "Implied cost of capital investment strategies: evidence from international stock markets," Annals of Finance, Springer, vol. 10(2), pages 171-195, May.
  • Handle: RePEc:kap:annfin:v:10:y:2014:i:2:p:171-195
    DOI: 10.1007/s10436-013-0236-3
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    File URL: http://hdl.handle.net/10.1007/s10436-013-0236-3
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    References listed on IDEAS

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    Cited by:

    1. Echterling, F. & Eierle, B. & Ketterer, S., 2015. "A review of the literature on methods of computing the implied cost of capital," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 235-252.

    More about this item

    Keywords

    Analyst forecasts; Implied cost of capital; International equity markets; Market efficiency; G11; G14; G15; M41;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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