The implied growth rates and country risk premium: evidence from Chinese stock markets

The implied growth rates and country risk premium: evidence from Chinese stock markets Realized stock market returns are volatile and poor reflections of economic growth and investor expectations in China. In this paper, we estimate simultaneously the implied long run growth rate and cost of equity capital for listed Chinese firms over the period 2004–2012. We find that the implied mean growth rate in earnings is around 10 % and the mean implied cost of capital is about 14.6 %. These suggest that the implied growth rates from companies’ fundamentals are in line with the economic growth and the implied cost of capital is consistent with investors’ expectations. Comparing with estimates for the US markets, we find that the mean country equity risk premium for this largest emerging market is about 6.5 %. Our study has important implications to the Chinese policy makers and international investors. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

The implied growth rates and country risk premium: evidence from Chinese stock markets

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Publisher
Springer US
Copyright
Copyright © 2014 by Springer Science+Business Media New York
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-014-0450-8
Publisher site
See Article on Publisher Site

Abstract

Realized stock market returns are volatile and poor reflections of economic growth and investor expectations in China. In this paper, we estimate simultaneously the implied long run growth rate and cost of equity capital for listed Chinese firms over the period 2004–2012. We find that the implied mean growth rate in earnings is around 10 % and the mean implied cost of capital is about 14.6 %. These suggest that the implied growth rates from companies’ fundamentals are in line with the economic growth and the implied cost of capital is consistent with investors’ expectations. Comparing with estimates for the US markets, we find that the mean country equity risk premium for this largest emerging market is about 6.5 %. Our study has important implications to the Chinese policy makers and international investors.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Mar 27, 2014

References

  • Terminal valuations, growth rates and the implied cost of capital
    Ashton, JD; Wang, P
  • Multiple large shareholders, control contests, and implied cost of equity
    Attig, N; Guedhami, O; Mishra, D
  • Time-varying world market integration
    Bekaert, G; Harvey, C
  • Emerging equity market volatility
    Bekaert, G; Harvey, C
  • Dating the integration of world equity markets
    Bekaert, G; Harvey, C; Lumsdaine, RL
  • Liquidity and expected returns: lessons from emerging markets
    Bekaert, G; Harvey, C; Lundblad, C
  • Legal protection of investors, corporate governance, and the cost of equity capital
    Chen, K; Chen, Z; Wei, K
  • Implied equity duration: a new measure of equity risk
    Dechow, P; Sloan, R; Soliman, M

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