Unconstrained Estimates of the Equity Risk Premium

Fitzgerald, Tristan; Gray, Stephen; Hall, Jason; Jeyaraj, Ravi

doi:10.2139/ssrn.1551748

Cited by 5 publications

(4 citation statements)

References 54 publications

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“…While the evidence in the preceding section suggests that innovative firms that are focused on the exploitation of their existing technologies (namely firms with high exploitation search focus scores) exhibit better subsequent operating performance, it is important to consider whether the market accurately incorporates this information into its earnings forecasts. On the one hand, it is possible that the operating outperformance of exploitation firms documented in the previous section simply reflects fundamental differences in the expected timing of returns for exploitative versus exploratory innovation that is efficiently incorporated into the market's future earnings projections (see generally Fitzgerald, Gray, Hall & Jeyaraj, 2013;Asquith, Mikhail & Au, 2005). Conversely, if the market fails to fully understand the positive impact of exploitative patents on future firm profitability, then we might observe more positive "earnings surprises" for exploitation-focused firms which may in turn result in these firms generating abnormally high future stock returns.…”

Section: Earnings Surprise and Exploitation Search Focusmentioning

confidence: 99%

Innovation Search Strategy and Predictable Returns

et al. 2021

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Because of the intangible and highly uncertain nature of innovation, investors may have difficulty processing information associated with a firm’s innovation search strategy. Due to cognitive and strategic biases, investors are likely to pay more attention to unfamiliar explorative patents rather than incremental exploitative patents. We find that innovative firms focusing on exploitation rather than exploration tend to generate superior subsequent short-term operating performance. Analysts do not seem to detect this, as firms currently focused on exploitation tend to outperform the market’s near-term earnings expectations. The stock market also seems unable to accurately incorporate information about a firm’s innovation search strategy. We find that firms with exploitation strategies are undervalued relative to firms with exploration strategies and that this return differential is incremental to standard risk and innovation-based pricing factors examined in the prior literature. This result suggests a more nuanced view on whether stock market pressure hampers innovation, and may have implications for optimal firm financing choices and corporate disclosure policy. This paper was accepted by David Simchi-Levi, finance.

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Section: Earnings Surprise and Exploitation Search Focusmentioning

confidence: 99%

Innovation Search Strategy and Predictable Returns

et al. 2021

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“…The analysis implicitly assumes that consensus analyst forecasts provide a fair representation of the cross‐sectional distribution of the dividends and earnings that are expected by the marginal investor who prices stocks . This follows previous research that uses analyst forecasts to proxy for market expectations in addressing asset pricing issues, notably the literature on implied cost of capital (see Fitzgerald et al ., ; Guay et al ., ). We also assume that the future imputation credits expected by the marginal investor can be derived from the most recently observed franking levels and corporate tax rates.…”

Section: Methodsmentioning

confidence: 98%

“…Fitzgerald et al . () suggest that analyst target prices may be more consistent with analyst forecasts than market prices. On the other hand, Clarkson et al .…”

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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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“…Ohlson and Juettner-Nauroth (2005) as well as Gode and Mohanram (2003) and Easton (2004) develop implied COEC estimates based on an abnormal earnings growth model. More recent innovations to COEC estimation have been developed from simultaneously-derived estimates of the COEC and growth (Nekrasov and Ogneva 2011), earnings estimates derived from cross-sectional models (Hou et al 2012), the rate of return inferred using option prices (Callen and Lyle 2013), individual analysts' earnings and target price forecasts (Fitzgerald, Gray, Hall, and Jeyaraj 2013), and recursive regression-based models (Lyle, Callen, and Elliott 2013;Lyle and Wang 2013).…”

Section: Implied Cost Of Equity Capital Estimates and Accounting Returnsmentioning

confidence: 99%

Implied Cost of Equity Capital Estimates as Predictors of Accounting Returns and Stock Returns

Larocque

Lyle²

2017

Journal of Financial Reporting

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Numerous influential finance and accounting studies describe how to reverse engineer cost of equity capital (COEC) estimates. A key motivation of these studies is that the COEC is important for capital budgeting and investment. Indeed, we show that there is a tautological relation between the COEC, market-to-book, and future ROE. Given this relation, one would expect future firm accounting returns to be correlated with cost of equity capital estimates. We find that very few of the implied COEC estimates which are commonly employed in academic studies are positively associated with future return on equity (ROE); in fact some implied COEC estimates are significantly negatively correlated with future ROE. A subset of COEC estimates based on the residual income model are positively associated with future ROE, as is the earnings-to-price ratio; however, contrary to intuition and theoretical predictions, all the COEC estimates based on the abnormal earnings growth model of Ohlson and Juettner-Nauroth (2005) are negatively associated with future ROE.

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Unconstrained Estimates of the Equity Risk Premium

Cited by 5 publications

References 54 publications

Innovation Search Strategy and Predictable Returns

Innovation Search Strategy and Predictable Returns

Are imputation credits capitalised into stock prices?

Implied Cost of Equity Capital Estimates as Predictors of Accounting Returns and Stock Returns

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