Aggregate implied cost of capital, option-implied information and equity premium predictability

Launhardt, Patrick; Miebs, Felix

doi:10.1016/j.frl.2019.101305

Cited by 2 publications

(2 citation statements)

References 16 publications

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“…Because social standards affect investor preferences, firms performing well with regard to CSR usually attract more investors as compared to those displaying lower success in matters of CSR. In the same line of thought, the idiosyncratic risk of the business is better diversified, which highlights the benefits of CSR on the equity cost of capital (Dhaliwal et al, 2011;Launhardt and Miebs, 2019).…”

Section: Hypothesis Development 221mentioning

confidence: 85%

Corporate ethical behavior and the cost of equity capital: evidence from the world’s most ethical companies

Zouari‐Hadiji

Chouaibi

2021

JFRA

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Purpose This paper aims to examine the effect of the corporate ethical approach on the cost of equity capital. This study is conducted on a large international sample on behalf of the world’s most engaged firms from an ethical point of view in 2015. Design/methodology/approach The multivariate linear regression model is used to meet the purpose of this study and research hypotheses are also examined using a sample of 80 of most ethical firms in the world during the year 2015. Moreover, three variables (i.e. business ethics, corporate social responsibility and executive compensation based on the achievement of sustainable development goals) are used to reflect the corporate ethical approach and the implied cost of equity capital is used for estimating the cost of equity. In this regard, equity cost estimation is the most appropriate approach to test the effect of business ethics on the cost of financing firms. Findings Based on a sample of 80 firms emerging as the world’s most ethical firms in 2015, the results revealed that firms with better ethics scores are significantly associated with a reduced cost of equity capital. This paper also demonstrates that the executive incentive pays that are based on the objectives of sustainable development are able to explain different outcomes regarding the relation between corporate ethical behaviors and the cost of equity. These findings support arguments in the literature that firms with socially responsible practices have a higher valuation and lower risk. Originality/value This study provides implications for global regulators and policymakers when setting social reporting standards, suggesting that corporate ethical engagement reduces the cost of equity capital by decreasing the information asymmetry and thereby reducing the firms’ risk. Therefore, the findings may be informative to international managers and investors when considering the effect of business ethics on the firm’s ex-ante cost of equity. In this perspective, the voluntary disclosure of information makes it possible to mitigate the problems of asymmetry of information and conflict of interest between the firm and its main providers of capital, which could reduce the cost of equity.

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Section: Hypothesis Development 221mentioning

confidence: 85%

Corporate ethical behavior and the cost of equity capital: evidence from the world’s most ethical companies

Zouari‐Hadiji

Chouaibi

2021

JFRA

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“…Technical indicators have been a popular approach in the past five years in predicting equity movements with the suggestion of adding social networks and blogs (Bustos & Pomares-Quimbaya, 2020) GDPR is a bridge between technical and fundamental in influencing equity premiums 1,3,6, and 12 (Algaba & Boudt, 2017). The invariant sample selection was used as the accuracy of out-of-sample prediction (Kolev & Karapandza, 2017) Callput implied volatility spread and option-implied information cost of capital (Launhardt & Miebs, 2020) have better performance among other predictors (Cao et al, 2020). Normalized composite leading indicators (NLCI) have the best performance among other indicators (Silva, 2015).…”

Section: Resultsmentioning

confidence: 99%

A Review of Factors that influence Equity Premium Literature: A Mini-Review Approach

Lubis

Halim

2022

IJFEB

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The equity premium (market risk premium) is one of the most crucial a basis for consideration of asset allocation and is one of the centers of asset pricing. Numerous previous researches have examined the factors that predict the size of the premium equity (excess return risk asset less risk-free assets). The premium equity size is why investors choose risky investments (stocks) over non-risk investments (saving products). This study aims to comprehend the predictor of the equity premium. This study was designed using qualitative approaches by reviewing several relevant pieces of literature. A total of 49 articles were collected from Science Direct, Wiley online library, and Taylor & Francis. The results indicated that oil price negatively affects the equity premium, especially during recessions and gold bars or coins. The economic policy uncertainty and return dispersion have negative relationships in China and others but not in U.S. commodities. Economic indicators have failed to predict equity premium in recession but have power with nonparametric tests in bullish markets. Technical indicators are better than economic indicators for predicting equity premium. The policy implication of this review article is the finding of trends in researching premium equity using predictive regression and structured predictive input that focuses more on the U.S. than on emerging markets, and none of the models have reached past 80 percent. Future research should make models analyze technical indicators and news by adding asymmetry, grouping based on equity and commodity distribution, time and profitability, and dynamic and macro models in emerging markets.

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Aggregate implied cost of capital, option-implied information and equity premium predictability

Cited by 2 publications

References 16 publications

Corporate ethical behavior and the cost of equity capital: evidence from the world’s most ethical companies

Corporate ethical behavior and the cost of equity capital: evidence from the world’s most ethical companies

A Review of Factors that influence Equity Premium Literature: A Mini-Review Approach

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