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Inferring the Cost of Capital Using the Ohlson–Juettner Model

Review of Accounting Studies volume 8, pages 399–431 (2003)Cite this 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.

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Authors and Affiliations

  1. Stern School of Business, New York University, 40 W 4th St, Suite 427, New York, NY, 10012

    Dan Gode

  2. Graduate School of Business, Columbia University, 605-A Uris Hall, New York, NY, 10027

    Partha Mohanram

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  1. Dan Gode
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  2. Partha Mohanram
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Correspondence to Dan Gode.

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Gode, D., Mohanram, P. Inferring the Cost of Capital Using the Ohlson–Juettner Model. Review of Accounting Studies 8, 399–431 (2003). https://doi.org/10.1023/A:1027378728141

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  • DOI: https://doi.org/10.1023/A:1027378728141

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