In this study, we propose an alternative technique for estimating the cost of equity capital. Specifically, we use a discounted residual income model to generate a market implied cost‐of‐capital. We then examine firm characteristics that are systematically related to this estimate of cost‐of‐capital. We show that a firm's implied cost‐of‐capital is a function of its industry membership, B/M ratio, forecasted long‐term growth rate, and the dispersion in analyst earnings forecasts. Together, these variables explain around 60% of the cross‐sectional variation in future (two‐year‐ahead) implied costs‐of‐capital. The stability of these long‐term relations suggests they can be exploited to estimate future costs‐of‐capital. We discuss the implications of these findings for capital budgeting, investment decisions, and valuation research.

Dividend increasing firms experience a significant decline in their systematic risk. They also experience a decline in profitability in the years after the dividend change and there is no evidence that firms that pay more dividends increase investments in future projects.Announcement-period market reaction to a dividend increase is significantly related to the subsequent decline in systematic risk. These findings suggest that dividend increases 2 may be an important element of a firm's long-term transition from growth phase to a more mature phase. The long-term price drift suggests that the market reaction to dividend changes may not incorporate the full extent of the decline in the cost of capital associated with dividend changes.3

This study shows that past trading volume provides an important link between "momentum" and "value" strategies. Specifically, we find that firms with high low! past turnover ratios exhibit many glamour~value! characteristics, earn lower higher! future returns, and have consistently more negative~positive! earnings surprises over the next eight quarters. Past trading volume also predicts both the magnitude and persistence of price momentum. Specifically, price momentum effects reverse over the next five years, and high~low! volume winners~losers! experience faster reversals. Collectively, our findings show that past volume helps to reconcile intermediate-horizon "underreaction" and long-horizon "overreaction" effects.* Both Lee and Swaminathan are from the Johnson Graduate School of Management, Cornell University. We thank

No abstract