Skip to main content

Inferring the Cost of Capital Using the Ohlson–Juettner Model


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.

This is a preview of subscription content, access via your institution.


  • Barth, M., J. Elliott and M. Finn. (1999). “Market Rewards Associated with Patterns of Increasing Earnings.” Journal of Accounting Research 37:2, 387-413.

    Google Scholar 

  • Barth, M. and A. Hutton. (2000). “Information Intermediaries and the Pricing of Accruals.” Working Paper, Stanford/Harvard University.

  • Bernard, V. (1995). “The Feltham-Ohlson Framework: Implications for Empiricists.” Contemporary Accounting Research 11:2, 733-747.

    Google Scholar 

  • Botosan, C. (1997). “Disclosure Level and the Cost of Equity Capital.” Accounting Review 72, 323-350.

    Google Scholar 

  • Botosan, C. and M. Plumlee. (2002). “Estimating Expected Cost of Equity Capital: A Theory-Based Approach.” Working Paper, University of Utah.

  • Brennan, M. J., N. Jegadeesh and B. Swaminathan. (1993). “Investment Analysis and the Adjustment of Stock Prices to Common Information.” Review of Financial Studies 6, 799-824.

    Google Scholar 

  • Claus, J. and J. Thomas. (2001). “Equity Premia as Low as Three Percent? Evidence from Analysts' Earnings Forecasts for Domestic and International Stock Markets.” Journal of Finance 56:3, 1629- 1666.

    Google Scholar 

  • Diamond, D. and R. Verrecchia. (1991). “Disclosure, Liquidity, and the Cost of Equity Capital.” Journal of Finance 46:4, 1325-1360.

    Google Scholar 

  • Easton, P. (2001). “Forecasts of earnings and earnings growth, PEG ratios, and the implied internal rate of return on investment in stocks.” Working Paper, Ohio State University.

  • Elton, E. (1999). “Expected Return, Realized Return and Asset Pricing Tests.” Journal of Finance 54:4, 1199-1220.

    Google Scholar 

  • Fama, E. and K. French. (1992). “The Cross-Section of Expected Stock Returns.” Journal of Finance 47:2, 427-465.

    Google Scholar 

  • Fama, E. and K. French. (1997). “Industry Costs of Equity.” Journal of Financial Economics 43:2, 153- 193.

    Google Scholar 

  • Fama, E. and J. MacBeth. (1973). “Risk, Return, and Equilibrium: Empirical Tests.” Journal of Political Economy 71, 607-636.

    Google Scholar 

  • Gebhardt, W., C. Lee and B. Swaminathan. (2001). “Toward an Implied Cost of Capital.” Journal of Accounting Research 39:1, 135-176.

    Google Scholar 

  • Gordon, R. and M. Gordon. (1997). “The Finite Horizon Expected Return Model.” Financial Analysts Journal 53:3, 52-61.

    Google Scholar 

  • Harris, R. and F. Marston. (1992). “Estimating Shareholder Risk Premia using Analysts' Growth Forecasts.” Financial Management 21:2, 63-70.

    Google Scholar 

  • Harris, R. and F. Marston. (2001). “The Market Risk Premium: Expectational Estimates using Analysts' Forecasts.” Journal of Applied Finance 1, 6-16.

    Google Scholar 

  • Harris, R., F. Marston, D. Mishra and T. O'Brien. (2002). “Ex Ante Cost of Equity Estimates of S&P 500: Firms and Global vs. Domestic CAPM.” Working Paper, University of Connecticut.

  • Healy, P., A. Hutton and K. Palepu. (1999). “Stock Performance and Intermediation Changes Surrounding Sustained Increases in Disclosure.” Contemporary Accounting Research 16, 485-520.

    Google Scholar 

  • La Porta, R. (1996). “Expectations and the Cross Section of Security Returns.” Journal of Finance 51, 1715-1742.

    Google Scholar 

  • Liu, J., D. Nissim and J. Thomas. (2002). “Equity Valuation using Multiples.” Journal of Accounting Research 40:1, 135-172.

    Google Scholar 

  • Malkiel, B. (1997). “Risk and Return Revisited.” Journal of Portfolio Management 23, 9-14.

    Google Scholar 

  • Marston, F. and R. Harris. (1993). “Risk and Return: A Revisit using Expected Returns.” Financial Review 28:1, 117-137.

    Google Scholar 

  • Modigliani, F. and M. Miller. (1958). “The Cost of Capital, Corporation Finance and Theory of Investment.” The American Economic Review XLVIII:3, 261-297.

    Google Scholar 

  • Mohanram, P. (2000). “How Do Young Firms Choose Among Different Modes of Disclosure?” Working Paper, New York University.

  • Ohlson, James A. and Beate Juettner-Nauroth. (2003). “Expected EPS and EPS Growth as Determinants of Value.” Working Paper, New York University.

Download references

Author information

Authors and Affiliations


Corresponding author

Correspondence to Dan Gode.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Gode, D., Mohanram, P. Inferring the Cost of Capital Using the Ohlson–Juettner Model. Review of Accounting Studies 8, 399–431 (2003).

Download citation

  • Issue Date:

  • DOI:

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