Rev Account Stud (2014) 19:1186–1190 DOI 10.1007/s11142-014-9288-5 Discussion of ‘‘Evaluating cross-sectional forecasting models for implied cost of capital’’ Mei Feng Published online: 23 May 2014 Springer Science+Business Media New York 2014 An estimate of the implied cost of capital (ICC) is useful in valuation, investment, and capital budgeting. The computation of ICC requires earnings forecasts, for which prior studies generally use analyst forecasts to proxy. Hou et al. (2012) generate earnings forecasts using a cross-sectional model and thus estimate ICC for a large sample of ﬁrms, including those not covered by analysts. Li and Mohanram (2014) extend Hou et al. by considering two other cross- sectional earnings forecast models (RI and EP models). Li and Mohanram compare their models with the one in Hou et al. in two ways. First, they show that the earnings forecasts generated from their models outperform those from the Hou et al. model on forecast accuracy, forecast bias, and earnings response coefﬁcients. Second, the ICC computed based on the earnings forecasts generated from the Hou et al. model exhibits lower correlations with future returns and more abnormal correlations with risk factors than the ICCs from the RI and EP models. The improvement in performance
Review of Accounting Studies – Springer Journals
Published: May 23, 2014
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