On the relation between expected returns and implied cost of capital

• 成果类型: Article; Proceedings Paper
• 署名作者: Hughes, John; Liu, Jing; Liu, Jun
• 署名单位: University of California System; University of California Los Angeles; University of California System; University of California San Diego
• 刊物名称: REVIEW OF ACCOUNTING STUDIES
• ISSN/ISSBN: 1380-6653
• DOI: 10.1007/s11142-009-9093-8
• 发表日期: 2009
• 页码: 246-259
• 关键词: VARIANCE DECOMPOSITION; DISCLOSURE LEVEL; STOCK; earnings; forecasts; MARKETS

摘要

We examine the relation between implied cost of capital and expected returns under an assumption that expected returns are stochastic, a property supported by theory and empirical evidence. We demonstrate that implied cost of capital differs from expected return, on average, by a function encompassing volatilities of, as well as correlation between, expected returns and cash flows, growth in cash flows, and leverage. These results provide alternative explanations for findings from empirical studies employing implied cost of capital on the magnitude of the market risk premium; predictability of future returns; and the relations between cost of capital and a host of firm characteristics, such as growth, leverage, idiosyncratic risk and the firm's information environment.