Managers, investors, and researchers have a compelling interest in identifying a reliable empirical proxy for firm‐specific cost of equity capital (r). In theory, deducing r is possible if the market's future cash flow forecast and current stock price are observable. Practically, deducing r is dependent on the ability to estimate the market's forecasted terminal value. We evaluate five methods of deducing firm‐specific r (labeled rDIVPREM, rGLSPREM, rGORPREM, rOJNPREM, and rPEGPREM) that deal with this conundrum differently. The extent to which the estimates are associated with firm risk in a stable and meaningful manner is the basis for our assessment. We find that the rDIVPREM and rPEGPREM estimates are consistently and predictably related to risk, while the alternatives are not. Based on these results, we conclude that rDIVPREM and rPEGPREM dominate the alternatives.
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1 January 2005
Research Article|
January 01 2005
Assessing Alternative Proxies for the Expected Risk Premium
Christine A. Botosan;
Christine A. Botosan
University of Utah.
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Marlene A. Plumlee
Marlene A. Plumlee
University of Utah.
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Online ISSN: 1558-7967
Print ISSN: 0001-4826
American Accounting Association
2005
The Accounting Review (2005) 80 (1): 21–53.
Citation
Christine A. Botosan, Marlene A. Plumlee; Assessing Alternative Proxies for the Expected Risk Premium. The Accounting Review 1 January 2005; 80 (1): 21–53. https://doi.org/10.2308/accr.2005.80.1.21
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