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Inferring the Cost of Capital Using the Ohlson–Juettner Model

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  • Dan Gode

    (New York University)

  • Partha Mohanram

    (Columbia University)

Abstract

We compare risk premia (RP) inferred using the Ohlson-Juettner (RPOJ) and residual income valuation (RPRIV) models in three ways: (1) correlation with risk factors; (2) correlation with RP estimated by multiplying current realizations of risk factors by coefficients obtained from regressing prior-year RP on prior-year risk factors; and (3) correlation with ex post returns. RPOJ has expected correlations with risk factors, a modest correlation with RP estimated from prior-year regressions, and an economically significant association with ex post returns. RPRIV has generally higher correlations, but regression coefficients are sensitive to whether the industry median ROE is computed with or without loss firms.

Suggested Citation

  • Dan Gode & Partha Mohanram, 2003. "Inferring the Cost of Capital Using the Ohlson–Juettner Model," Review of Accounting Studies, Springer, vol. 8(4), pages 399-431, December.
    • Handle: RePEc:spr:reaccs:v:8:y:2003:i:4:d:10.1023_a:1027378728141
    DOI: 10.1023/A:1027378728141
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