Inferring the Cost of Capital Using the Ohlson–Juettner Model

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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Inferring the Cost of Capital Using the Ohlson–Juettner Model

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2003 by Kluwer Academic Publishers
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1023/A:1027378728141
Publisher site
See Article on Publisher Site

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.

Journal

Review of Accounting StudiesSpringer Journals

Published: Oct 3, 2004

References

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