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Investment-based Costs of Equity

Author

Listed:
  • Yicheng Liu
  • Chen Xue
  • Lu Zhang

Abstract

The q5-characteristics model estimates costs of equity as Lewellen’s (2015) out-of-sample forecasts from cross-sectional regressions. The q5-cost of equity is competitive in evaluation tests, outperforming the accounting implied cost of equity in predicting cross-sectional returns. The q5-cost of equity is precise at the industry level and aligned with average factor premiums. Its firm-level distribution is weakly left-skewed, whereas the accounting implied cost of equity is right-skewed. However, the accounting cost of equity outperforms in the time series. Factor models perform poorly in out-of-sample tests. Gradient-boosted trees improve on cross-sectional regressions, but not reliably.

Suggested Citation

  • Yicheng Liu & Chen Xue & Lu Zhang, 2026. "Investment-based Costs of Equity," NBER Working Papers 35040, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:35040
    Note: AP CF
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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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