Degrees-of-freedom problem and implied cost of equity capital

作者：Kryzanowski Lawrence^*; Rahman Abdul H

来源：Finance Research Letters, 2009, 6(3): 171-178.

DOI：10.1016/j.frl.2009.03.002

• Degrees-of-freedom problem
• Implied cost of equity
• Ohlson and Juettner-Nauroth model

Bias in implied cost of equity estimates arises from analyst optimism and a degrees-of-freedom problem. The common practice in empirical studies of using a proxy for the earnings forecast horizon beyond two years in the Ohlson and Juettner-Nauroth (OJ) model is potentially biased. We derive a generalized OJ model over a T period forecast horizon and indicate the extent of this bias. The implied cost of equity capital is obtained from a quadratic equation, where our constant term comprises T short-term annual earnings per share growth rates, rather than just the next-period counterpart in the OJ model.

• 出版日期2009-9