Implied Cost of Equity Capital Estimates as Predictors of Accounting Returns and Stock Returns

Stephannie Larocque, Matthew Robert Lyle

Research output: Working paper

Abstract

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 languageEnglish (US)
PublisherSocial Science Research Network (SSRN)
Number of pages46
Publication statusPublished - Feb 26 2016

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