The implied cost of capital: A new approach

Hou, Kewei; Dijk, Mathijs A. Van; Zhang, Yinglei

doi:10.1016/j.jacceco.2011.12.001

Cited by 468 publications

(232 citation statements)

References 96 publications

(111 reference statements)

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“…This result confirms the findings of Gerakos and Gramacy (2013) on the good performance of random walk forecasts. Moreover, almost all cross-sectional earnings forecasts based estimators are negatively correlated with realized return indicating, once again, the poor quality of Hou et al (2012)"s model earnings forecasts as evidenced by Li and Mohanram (2014). Additionally, according to the correlation with realized return criterion, the more valid estimators are those of Dividend approach for random walk and cross-sectional earnings forecasts and those of AEG approach for smoothing earnings forecasts.…”

Section: Resultsmentioning

confidence: 97%

“…Hence the rejection of our first research hypothesis (H1). As for AEG approach feasibility deficiency, especially according to cross-sectional earnings forecasts, it could come from earnings incapacity to reflect Tunisian Stock Market expectations or probably from the poor quality of Hou et al (2012)"s model earnings forecasts as established by Li and Mohanram (2014).…”

Section: Resultsmentioning

confidence: 99%

“…In addition to these conceptual attributes, the interest of the OJ model (2005) is mainly empirical. Indeed, the model is at the basis of many studies dealing with AEG approach implementation, particularly in the Implied Cost of Capital estimation, such as Gode and Mohanram (2003); Easton and Monahan (2005); Lee, So, and Wang (2014); Hou et al (2012). Furthermore, the introduction of some restrictions on the main model allowed regaining several ratios that are widely used by practitioners, such as Price-to-forward Earnings (PE), Price-to-forward Earnings Growth (PEG) and modified Easton (2004) PEG.…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

See 2 more Smart Citations

The Implied Cost of Capital: An Empirical Assessment in the Tunisian Context

Mahjoubi¹,

Abaoub²,

Belhaj³

2015

IBR

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This research is a feedback to Wang (2015) suggesting that realized returns should be used in conjunction with ICCs to make more robust inferences about expected returns. We examine the validity of six firm-specific ICCs along with a synthetic one, in the Tunisian context, according to their feasibility and their correlation with realized return. The examined estimators are calculated according to three types of earnings forecasts: smoothing, random walk and cross-section. These estimators represent three main valuation approaches: Present Value of Expected Dividend (PVED), Residual Income Valuation Model (RIV) and Abnormal Earnings Growth (AEG). Our results confirm the assertions of Gerakos and Gramacy (2013) on random walk forecasts" good performance as well as those of Li and Mohanram (2014) on the poor quality of Hou et al. (2012)"s cross-section forecasts. Furthermore, dividend seems best reflecting Tunisian stock market expectations concerning future revenues which would be generated by the valuated asset. These findings bring into question the relevance of new accounting valuation approaches which are anchored rather on equity book value (RIV) and on earnings forecasts (AEG).

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Section: Resultsmentioning

confidence: 97%

Section: Resultsmentioning

confidence: 99%

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

See 1 more Smart Citation

The Implied Cost of Capital: An Empirical Assessment in the Tunisian Context

Mahjoubi¹,

Abaoub²,

Belhaj³

2015

IBR

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“…We apply a cross-section forecast model proposed by Fama and French (2000) and adapted by Hou, Dijk, and Zhang (2012).…”

Section: Empirical Implementation Of the Valuation Modelsmentioning

confidence: 99%

The Role of Earnings Persistence in Valuation Accuracy and the Time Horizon

Pimentel

Aguiar

2016

Rev. adm. empres.

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Based on the assumption that earnings persistence has implications for both financial analysis and compensation contracts, the aim of this paper is to investigate the role of earnings persistence assuming that (i) more persistent earnings are likely to be a better input to valuation models and (ii) more persistent earnings are likely to serve as a proxy for long-term market and managerial orientation. The analysis is based on Brazilian listed firms from 1995 to 2013, and while we document strong support for the relevance of earnings persistence in financial analysis and valuation, we fail to document a significant relationship between earnings persistence and long-term value orientation. These results are sensitive to different specifications, and additional results suggest that firms' idiosyncratic risk (total risk) is relevant to explain the focus on short-term outcomes (short-termism) across firms. The main contribution of this paper is to offer empirical evidence for the relevance of accounting numbers in both valuation and contractual theories in an emergent market.

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“…Ho, Lee, Lin, and Yu (2017) empirically compare three common valuation models: (1) A multi-stage formulation of the traditional constant growth model as demonstrated by Chen, Chen, andWei (2011) andHou, van Dijk, andZhang (2012), (2) A multistage formulation of the RIM approach as demonstrated by Claus and Thomas (2001) and Gebhardt, Lee, and Swaminathan (2001), and (3) The Ohlson-Juettner (2005) earnings capitalization model. They find that the Ohlson-Juettner model provides more reliable results.…”

Section: Introduction and Literature Reviewmentioning

confidence: 99%

A Flexible Valuation Model Incorporating Declining Growth Rates

Holland

2017

AFR

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A new model is developed in this paper which demonstrates a flexible method for modeling a cash flow stream with a declining growth rate that asymptotically approaches a mature long-term growth rate. This model can be applied when the initial growth rate in cash flows is temporarily larger than the required rate of return. A simple closed form equation of the valuation model is presented along with an example to illustrate the valuation of future cash flows with a declining growth rate. A comparison is made with the valuation from multi-stage models that have constant growth segments, the H-Model, and the Ohlson-Juettner model. This highlights the difference in valuation that results from using this new model. An example is also included to illustrate how to match a decline curve to a specific forecast of future cash flows. This new declining growth model provides a flexible and practical approach for valuing equities.

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The implied cost of capital: A new approach

Cited by 468 publications

References 96 publications

The Implied Cost of Capital: An Empirical Assessment in the Tunisian Context

The Implied Cost of Capital: An Empirical Assessment in the Tunisian Context

The Role of Earnings Persistence in Valuation Accuracy and the Time Horizon

A Flexible Valuation Model Incorporating Declining Growth Rates

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