Toward an Implied Cost of Capital

Discussion of "Earnings, Book Values, and Dividends in Equity Valuation: An Empirical Perspective"

“…Existing research has just begun to scratch the surface of this important question. 4 A similar first-stage feel exists with respect to the questions of firm-specific risk (Gebhardt, Lee, and Swaminathan 2000), information asymmetry (Hand and Landsman 2000), detail in accounting (Barth, Beaver, and Landsman 1992;Barth, Beaver, Hand, and Landsman 1999), taxes (Collins and Kemsley 2000;Harris and Kemsley 1999), real options (Constantinides and Ye 1999;Yee 2000;G. Zhang 1999), and the time-series properties of abnormal earnings (Dechow, Hutton, and Sloan 1999).…”

Do Managers Value Stock Options and Restricted Stock Consistent with Economic Theory?*

“…With respect to restricted stock, economic theory suggests that suboptimally diversified managers will react to an increase in stock return volatility by increasing the risk premium that they associate with holding restricted shares (Gebhardt, Lee, and Swaminathan 2001;Karolyi 2001). Ceteris paribus, increasing the risk premium decreases the present value of future earnings or cash flows.…”

CEO Risk‐Related Incentives and Income Smoothing*

“…Evidence from both academia and industry indicate that both shareholders and managers attempt to reduce earnings and stock price volatility. A long stream of research indicates that stock return volatility may increase a firm's cost of capital (Beaver, Kettler, and Scholes 1970;Gebhardt, Lee, and Swaminathan 2001;Minton and Schrand 1999). Similar to share price variability, earnings variability is also interpreted as an important measure of a firm's overall riskiness and has a direct effect on the value of a firm's shares (Barth, Landsman, and Wahlen 1995;Beaver et al 1970;Beidleman 1973;Dye 1988;Gebhardt et al 2001;Gordon 1964;Sadka 2007;Wang and Williams 1994).…”