Implied Cost of Capital Based Investment Strategies - Evidence from International Stock Markets
Annals of Finance
30 Pages Posted: 2 Mar 2007 Last revised: 18 May 2013
Date Written: April 1, 2013
Abstract
Investors can generate excess returns by implementing trading strategies based on publicly available equity analyst forecasts. This paper captures the information provided by analysts by the implied cost of capital (ICC), the internal rate of return that equates a firm's share price to the present value of analysts' earnings forecasts. We find that U.S. stocks with a high ICC outperform low ICC stocks on average by 6.0% per year. This spread is signicant when controlling the investment returns for their risk exposure as proxied by standard pricing models. Further analysis across the world's largest equity markets validates these results.
Keywords: analyst forecasts, implied cost of capital, international equity markets, market efficiency
JEL Classification: G11, G14, G15, M41
Suggested Citation: Suggested Citation
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