Evaluating cross-sectional forecasting models for implied cost of capital

Li, Kevin K.; Mohanram, Partha S.

doi:10.1007/s11142-014-9282-y

Cited by 188 publications

(162 citation statements)

References 27 publications

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“…These estimators represent three main valuation approaches: Present Value of Expected Dividend (PVED), Residual Income Valuation Model (RIV) and Abnormal Earnings Growth (AEG). Our results confirm the assertions of Gerakos and Gramacy (2013) on random walk forecasts" good performance as well as those of Li and Mohanram (2014) on the poor quality of Hou et al (2012)"s cross-section forecasts. Furthermore, dividend seems best reflecting Tunisian stock market expectations concerning future revenues which would be generated by the valuated asset.…”

Section: Introductionsupporting

confidence: 89%

“…This result confirms the findings of Gerakos and Gramacy (2013) on the good performance of random walk forecasts. Moreover, almost all cross-sectional earnings forecasts based estimators are negatively correlated with realized return indicating, once again, the poor quality of Hou et al (2012)"s model earnings forecasts as evidenced by Li and Mohanram (2014). Additionally, according to the correlation with realized return criterion, the more valid estimators are those of Dividend approach for random walk and cross-sectional earnings forecasts and those of AEG approach for smoothing earnings forecasts.…”

Section: Resultsmentioning

confidence: 97%

“…Hence the rejection of our first research hypothesis (H1). As for AEG approach feasibility deficiency, especially according to cross-sectional earnings forecasts, it could come from earnings incapacity to reflect Tunisian Stock Market expectations or probably from the poor quality of Hou et al (2012)"s model earnings forecasts as established by Li and Mohanram (2014).…”

Section: Resultsmentioning

confidence: 99%

See 2 more Smart Citations

The Implied Cost of Capital: An Empirical Assessment in the Tunisian Context

Mahjoubi¹,

Abaoub²,

Belhaj³

2015

IBR

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This research is a feedback to Wang (2015) suggesting that realized returns should be used in conjunction with ICCs to make more robust inferences about expected returns. We examine the validity of six firm-specific ICCs along with a synthetic one, in the Tunisian context, according to their feasibility and their correlation with realized return. The examined estimators are calculated according to three types of earnings forecasts: smoothing, random walk and cross-section. These estimators represent three main valuation approaches: Present Value of Expected Dividend (PVED), Residual Income Valuation Model (RIV) and Abnormal Earnings Growth (AEG). Our results confirm the assertions of Gerakos and Gramacy (2013) on random walk forecasts" good performance as well as those of Li and Mohanram (2014) on the poor quality of Hou et al. (2012)"s cross-section forecasts. Furthermore, dividend seems best reflecting Tunisian stock market expectations concerning future revenues which would be generated by the valuated asset. These findings bring into question the relevance of new accounting valuation approaches which are anchored rather on equity book value (RIV) and on earnings forecasts (AEG).

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Section: Introductionsupporting

confidence: 89%

Section: Resultsmentioning

confidence: 97%

Section: Resultsmentioning

confidence: 99%

See 1 more Smart Citation

The Implied Cost of Capital: An Empirical Assessment in the Tunisian Context

Mahjoubi¹,

Abaoub²,

Belhaj³

2015

IBR

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“…We estimate the following cost of equity regression:

\begin{matrix} true \\ right {CofE}_{i, t + 1} = α_{1} + α_{2} {DQ}_{i, t} + α_{3} {Beta}_{i, t} + α_{4} {BTM}_{i, t} + α_{5} prefixlog {(italicMV)}_{i, t} \\ right + \sum {Fundamenals}_{i, t} + \sum I n d_F E + \sum Y r_F E + ɛ_{i, t}, \end{matrix}

where cost of equity, CofE , is estimated using the average of three implied cost of equity capital measures developed in prior literature (MPEG, GM, and Claus and Thomas []) evaluated in Botosan and Plumlee [] and Easton and Monahan []. The forecasts of future earnings in all three methods are based on the approach proposed in Li and Mohanram [] to address concerns that optimistic analysts' forecasts lead to biased estimates of implied cost of capital (see Easton and Monahan [], Kothari, Li, and Short []). Following prior research (Francis et al.…”

Section: Validation Testsmentioning

confidence: 99%

“…Variable definitions: CofE = average of implied cost of equity estimated using the MPEG, GM, and CT methods. The forecasts of future earnings used in all three estimation methods are based on the approach proposed in Li and Mohanram []; Beta = CAPM beta estimated using the Scholes–Williams method over the most recent calendar year ending before current fiscal year end; MV = market value of equity at the current fiscal year end. All other variables are defined as in the notes to tables and.…”

Section: Validation Testsmentioning

confidence: 99%

A New Measure of Disclosure Quality: The Level of Disaggregation of Accounting Data in Annual Reports

Chen

Miao

Shevlin

2015

J of Accounting Research

267

187

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We construct a new, parsimonious, measure of disclosure quality—disaggregation quality (DQ)—and offer validation tests. DQ captures the level of disaggregation of accounting data through a count of nonmissing Compustat line items, and reflects the extent of details in firms’ annual reports. Conceptually, DQ differs from existing disclosure measures in that it captures the “fineness” of data and is based on a comprehensive set of accounting line items in annual reports. Unlike existing measures, which are usually applicable for a subset of firms or are based on a subset of information items, DQ can be generated for the universe of Compustat industrial firms. We conduct three sets of validation tests by examining DQ's association with variables predicted by prior literature to be associated with information quality. DQ is negatively (positively) associated with analyst forecast dispersion (accuracy) and negatively associated with bid‐ask spreads and cost of equity. These associations continue to hold after we control for firm fundamentals. Taken together, results from this battery of validation tests are consistent with our measure capturing disclosure quality.

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Robust approach to earnings forecast: A comparison

Yu,

Zhang,

Lien

2024

Journal of Forecasting

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This paper applies three robust approaches, namely, the MM estimation, the Theil–Sen estimation, and the quantile regression, to generate earnings forecasts in Chinese financial market and evaluates the forecast accuracy of these three methods based on three forecasting criteria. We examine six forecasting models where the predicted variables include earnings per share, net income, and three profitability measures. We show that the three robust methods significantly outperform the OLS method. Moreover, the MM estimation and the quantile regression have better forecast accuracy than the Theil–Sen approach.

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Evaluating cross-sectional forecasting models for implied cost of capital

Cited by 188 publications

References 27 publications

The Implied Cost of Capital: An Empirical Assessment in the Tunisian Context

The Implied Cost of Capital: An Empirical Assessment in the Tunisian Context

A New Measure of Disclosure Quality: The Level of Disaggregation of Accounting Data in Annual Reports

Robust approach to earnings forecast: A comparison

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