The Implied Cost of Capital: A New Approach

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

doi:10.2139/ssrn.1535362

Cited by 49 publications

(94 citation statements)

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“…Our approach is also consistent with Hou et al. (), who use capital (they use assets, we use book value of equity), earnings, and dividends to create value‐relevant cross‐sectional earnings forecasts. By including these variables in our price‐level regression, we bypass the construction of explicit forecasts and capture the implications for price directly…”

Section: Research Design and Samplementioning

confidence: 63%

“…We control for the effects of other factors associated with future returns by creating quintiles based on ranks of the following characteristics: (i) size ( MVE ); (ii) the book‐to‐market ratio ( BTM ); (iii) prior 6‐month size‐adjusted abnormal returns ( AR_LAG ); (iv) BETA ; (v) the F ‐score from Piotroski (); (vi) volatility of monthly returns over the prior year; (vii) V/P ratio following Frankel and Lee () but using cross‐sectional earnings forecasts as in Hou et al. () instead of analysts' forecasts; and (viii) accruals following Sloan () . We scale all quintile ranks to range from 0 to 1, so the coefficients can be interpreted as the spread in returns across extreme portfolios on each characteristic after controlling for the return implications of the other characteristic portfolios.…”

Section: Resultsmentioning

confidence: 99%

“…We drop observations without sufficient financial statement data to be included in our cross‐sectional price‐level regressions, and without sufficient data to implement the cross‐sectional forecasting technique in Hou et al. (). Our final sample consists of 81,301 firm‐year observations.…”

Section: Research Design and Samplementioning

confidence: 99%

“…Our approach represents a simpler and more direct way to estimate share value that does not require analyst forecasts or explicit assumptions about key valuation parameters. When our estimated value deviates from price, we ask whether the stock is mispriced by examining the behavior of future returns, and we benchmark our returns against returns to the Frankel and Lee () approach modified to reflect recent innovations in cross‐sectional forecasting from Hou, van Dijk, and Zhang ().…”

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

Pricing and Mispricing of Accounting Fundamentals in the Time‐Series and in the Cross Section

Nichols

Wahlen

Wieland

2017

Contemporary Accting Res

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This study examines the extent to which parsimonious and general cross-sectional valuation models, restricted to include only publicly available historical accounting information, explain share prices in the cross section, identify periods when market mispricing may be more pervasive, and also identify which shares within those cross sections are more likely to be mispriced. Our model simply includes historical book value, earnings, dividends, and growth, but it explains on average over 60 percent of the cross-sectional variation in share prices in annual estimations across 1975-2011. We also examine the extent to which the residuals indicate mispricing. The quintile of stocks picked by our model as most likely underpriced outperform the quintile of stocks picked as most likely overpriced by an average of 9.9 percent over the following 12 months, after controlling for size. We also predict and find that value residuals are better predictors of future abnormal returns: (i) among firms that are not covered by analysts; (ii) among firms that face fewer accounting measurement challenges; and (iii) when we estimate value model parameters by industry/year. We also predict and find our approach works better in periods when the mapping of fundamentals into prices is weaker. This study contributes a novel and straightforward approach to map accounting fundamentals into share prices in order to identify mispricing in time-series and in the cross section. Evaluation et erreurs d' evaluation des param etres comptables fondamentaux dans la s erie chronologique et l' echantillon * Accepted by Partha S. Mohanram. We appreciate helpful comments and suggestions from the editor and two anonymous reviewers, as well as Tom Canace and Marilyn Johnson, and workshop participants at the estimations annuelles de la p eriode 1975-2011. Les auteurs se demandent egalement dans quelle mesure les valeurs r esiduelles r ev elent des erreurs d' evaluation. Les rendements du quintile des titres choisis, selon leur mod ele, comme etant les plus susceptibles d'être sous-e valu es exc edent de 9,9 pour cent, en moyenne, les rendements du quintile des titres choisis comme etant les plus susceptibles d'être sur evalu es, au cours des 12 mois suivant l'estimation du mod ele, une fois contrôl ee la taille. Les auteurs pr evoient, et constatent egalement, que les valeurs r esiduelles sont de meilleurs indicateurs des rendements futurs anormaux i) parmi les soci et es qui ne retiennent pas l'attention des analystes, ii) parmi celles pour qui l' evaluation comptable pr esente moins de difficult es et iii) lorsque les auteurs estiment les param etres du mod ele de la valeur selon le secteur et l'ann ee. Conform ement a leur hypoth ese, les auteurs constatent aussi la sup eriorit e de leur m ethode dans les p eriodes o u l' etablissement de la correspondance entre les param etres fondamentaux et les cours est moins convaincante. Les auteurs proposent donc une m ethode in edite et simple pour etablir la correspondance entre les param etres comptables fondame...

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Section: Research Design and Samplementioning

confidence: 63%

Section: Resultsmentioning

confidence: 99%

Section: Research Design and Samplementioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Pricing and Mispricing of Accounting Fundamentals in the Time‐Series and in the Cross Section

Nichols

Wahlen

Wieland

2017

Contemporary Accting Res

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“…The capitalisation of ‘terminal’ earnings in this manner implicitly assumes that earnings in year t + 3 are a good proxy for maintainable cash flows, that is, a real income stream available for distribution in perpetuity . The Gordon and Gordon () model appears to have lower pricing errors than competing valuation models (see Lee et al ., ; Hou et al ., ), implying that it should generate more robust findings. Equation (3) defines the two components under the empirical application of our DCF valuation model.…”

Section: Methodsmentioning

confidence: 99%

Are imputation credits capitalised into stock prices?

Siau¹,

Sault

Warren

2013

Account Finance

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We investigate whether imputation tax credits are capitalised into Australian stock prices by utilising discounted cash-flow valuation models and examining the relation between earnings yields and imputation credit yields. While imputation credits are valuable to many investors, the evidence that they are reflected in share prices is at best mixed and largely unconvincing. Our results reveal that imputation credits fail to lower realised returns casting doubts over whether imputation credits are priced from the perspective of longer-term buyand-hold investors. If so, such investors can expect to fully benefit from their imputation credits, and imputation effects may not impact on the cost of capital.

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Size effect and the measurement of firm size

et al. 2021

Manage Decis Econ

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The size effect is mainly observed when firm size is measured by stock market value and absent when measured by firm's total asset, book equity, or total revenue. We argue that if the profitability shocks are neutralized on cross section, the Chinese equity market shows a significant size effect in ex ante expected returns no matter how firm size is measured. Moreover, the size premium measured by market value is indeed larger than those measured in other variables. We provide evidences that the value factor (HML) and the short‐term reversal factor (LMW) can moderate this extra premium.

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The Implied Cost of Capital: A New Approach

Cited by 49 publications

References 0 publications

Pricing and Mispricing of Accounting Fundamentals in the Time‐Series and in the Cross Section

Pricing and Mispricing of Accounting Fundamentals in the Time‐Series and in the Cross Section

Are imputation credits capitalised into stock prices?

Size effect and the measurement of firm size

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