Review of Accounting Studies

, Volume 8, Issue 4, pp 399–431

Inferring the Cost of Capital Using the Ohlson–Juettner Model

Article

Abstract

We compare risk premia (RP) inferred using the Ohlson-Juettner (RPOJ) and residual income valuation (RPRIV) models in three ways: (1) correlation with risk factors; (2) correlation with RP estimated by multiplying current realizations of risk factors by coefficients obtained from regressing prior-year RP on prior-year risk factors; and (3) correlation with ex post returns. RPOJ has expected correlations with risk factors, a modest correlation with RP estimated from prior-year regressions, and an economically significant association with ex post returns. RPRIV has generally higher correlations, but regression coefficients are sensitive to whether the industry median ROE is computed with or without loss firms.

implied cost of capital ex-ante cost of capital risk premium equity valuation risk 

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Copyright information

© Kluwer Academic Publishers 2003

Authors and Affiliations

  1. 1.Stern School of BusinessNew York UniversityNew York
  2. 2.Graduate School of BusinessColumbia UniversityNew York

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