This study evaluates popular proxies for expected returns as predictors of accounting and stock returns. Prior research finds a tautological relation between expected returns, market-to-book, and future return on equity (ROE). Despite this, we find very few commonly-employed implied cost of equity capital (ICC) estimates are positively associated with future ROE after controlling for book-to-market. This weak association with future ROE appears to affect ICC estimates’ ability to forecast future stock returns: we find no evidence that ICC estimates contain incremental information about future stock returns beyond that contained in a linear combination of lagged ROE and book-to-market.
|Original language||English (US)|
|Publisher||Social Science Research Network (SSRN)|
|Number of pages||46|
|State||Published - Feb 26 2016|
Larocque, S., & Lyle, M. R. (2016). Implied Cost of Equity Capital Estimates as Predictors of Accounting Returns and Stock Returns. Social Science Research Network (SSRN). http://ssrn.com/abstract=2370686