Theoretically, the implied cost of capital (ICC) is a good proxy for time-varying expected returns. We find that aggregate ICC strongly predicts future excess market returns at horizons ranging from one month to four years. This predictive power persists even in the presence of popular valuation...

This paper tests international asset pricing models using firm level expected returns estimated from the implied cost of capital approach and contrasts the results with those based on realized returns. Among G7 countries, we find that the implied cost of capital based expected returns are only...

This study presents a new methodology for estimating international cost of capital. Using a discounted cash flow model, we estimate market implied risk premia for firms in the G-7 countries during the 1990 to 2000 time period. We find that the average risk premia in G-7 countries typically fall...

This paper tests international asset pricing models using firm-level expected returns estimated from an implied cost of capital approach. We show that the implied approach provides clear evidence of economic relations that would otherwise be obscured by the noise in realized returns. Among G-7...

This paper examines whether the market underreacts to the negative information implicit in the SEO (seasoned equity offerings) announcements. While rational and mispricing theories both predict SEO's, in the aggregate, should earn low returns in the long run, they offer sharply different...

In this paper we examine the impact of payout policy on cost of capital. Using forward-looking implied cost of capital as a measure of expected returns, we examine the cross-sectional relation between cost of capital and (a) the level of payout and (b) the distribution policy choice between...

We argue that the implied cost of capital (ICC), computed using earnings forecasts, is useful in capturing time variation in expected stock returns. First, we show theoretically that ICC is perfectly correlated with the conditional expected stock return under plausible conditions. Second, our...

This paper finds that the corporate bonds of firms with high accruals underperform corporate bonds of firms with low accruals. Our results show that an accrual measure that includes capital investments provides higher and more statistically significant underperformance than a measure that...

A company's industry affiliation is commonly used to construct homogeneous stock groupings for portfolio risk management, relative valuation, and peer-group comparisons. A variety of industry classification systems have been adopted, however, creating disagreements as to companies' industry...

Firms that increase (decrease) dividends experience a significant decline (increase) in their systematic risk. The dividend-increasing firms do not increase their capital expenditure and experience a decline in profitability in the years after the dividend change. The positive market reaction to...