Implied cost of equity capital in earnings-based valuation model: Evidence from Korea

Sung Yoon Ahn, Seung Min Cha, Young Woo Ko, Yong Keun Yoo

Research output: Contribution to journalArticlepeer-review

15 Citations (Scopus)

Abstract

We provide empirical evidence regarding the reliability of implied cost of equity capital based on the earnings-based valuation models in Korea. We find that the implied cost of equity capital is more reliable as the estimate of unobservable ex-ante cost of equity capital than the realized stock return in Korea. Furthermore, we find that the implied cost of equity capital from the residual income valuation model (Ohlson, 1995) outperforms that from the abnormal earnings growth valuation model (Ohlson and Juettner-Nauroth, 2005) in the estimation of ex-ante cost of equity capital in Korea. Our study will contribute to Korean academics by suggesting a more reliable way to derive the estimates of exante cost of equity capital.

Original languageEnglish
Pages (from-to)599-626
Number of pages28
JournalAsia-Pacific Journal of Financial Studies
Volume37
Issue number4
Publication statusPublished - 2008

Keywords

  • Abnormal earnings growth valuation model
  • Ex-ante cost of equity capital
  • Implied cost of equity capital
  • Residual income valuation model
  • Risk proxies

ASJC Scopus subject areas

  • Finance

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