Implied cost of capital and accounting conservatism: analytical and empirical evidence
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| Main Author: | |
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| Format: | Thesis Book |
| Language: | English |
| Published: |
Bamberg
Simeon Ketterer
January 2018
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| Subjects: | |
| Online Access: | Inhaltsverzeichnis |
| Physical Description: | XXVI, 252 Seiten Diagramme |
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| 245 | 1 | 0 | |a Implied cost of capital and accounting conservatism |b analytical and empirical evidence |c Simeon Ketterer |
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Record in the Search Index
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| adam_text | Contents
Preface V
Acknowledgements VII
Contents IX
List of Figures XIV
List of Tables XVI
List of Abbreviations and Symbols XIX
1. Introduction 1
1.1. Motivation................................................................ 1
1.2. Research objectives and outline of the thesis............................. 4
2. Risk, return and conventional asset pricing models 7
2.1. Preliminaries ............................................................ 7
2.2. CAPM...................................................................... 8
2.3. Multifactorial asset pricing models ..................................... 10
2.4. Conclusion............................................................... 13
3. Accounting-based business valuation models 15
3.1. Preliminaries ........................................................... 15
3.2. Dividend discount model.................................................. 17
3.2.1. Basie and Gordon growth model............................ 17
3.2.2. Terminal value considerations..................................... 18
3.3. Valuation models relying on accounting data.............................. 21
» 3.3.1. A machinery for accounting-based valuation models................. 21
3.3.2. Residual income valuation model.................................... 22
3.3.2.1. Basic model.............................................. 22
3.3.2.2. Terminal value considerations............................ 23
3.3.2.3. Linear information dynamic models......................... 25
IX
Contents
3.3.3. Abnormal earnings growth model.................................... 27
3.3.3.1. Basic model.............................................. 27
3.3.3.2. Terminal value considerations.............................28
3.4. Empirical implementations to estimate intrinsic values .................. 30
3.4.1. RIM implementations and market explanations....................... 31
3.4.2. Performance of the accounting-based valuation models ............. 34
3.4.3. Summary........................................................... 40
3.5. Major attributes of DOM, RIM and AEGM.................................... 41
3.5.1. Steady-state environment ......................................... 44
3.5.2. Non steady-state environment...................................... 50
3.5.3. Considerations about the clean-surplus relation .................. 55
3.6. Conclusion............................................................... 57
4. Accounting conservatism and its impact on valuation 59
4.1. Preliminaries ........................................................... 59
4.2. Accounting conservatism and valuation models..............................62
4.2.1. Conservative accounting and accounting fundamentals .............. 63
4.2.2. Considerations on valuation models in general..................... 66
4.2.3. Linear information dynamic models................................. 71
4.3. Empirical literature dealing with accounting conservatism and equity valu-
ation ........................................................................ 77
4.3.1. Earnings quality ................................................. 78
4.3.2. Interpreting the return on equity................................. 79
4.3.3. Analysts? forecasts............................................... 81
4.3.4. Residual income valuation model .................................. 81
4.3.5. Risk conveyed by conservatism .................................... 82
4.3.6. Cost of equity capital............................................ 83
4.4. Conclusion............................................................... 85
5. Approaches to estimate implied cost of capital 87
5.1. Preliminaries ........................................................... 87
5.2. Implied cost of capital approaches........................................88
5.2.1. Firm-level approaches ............................................ 88
5.2.2. Portfolio-level approaches ....................................... 98
5.2.3. Comparison of firm-level and portfolio-level results .............105
5.2.4. Summary of main implied cost of capital approaches................108
5.2.5. Other implied cost of capital approaches..........................110
X
Contents
r 3 Methods for assessing the validity of implied cost of capital estimates . . . Ill
5 3.1. Implied cost of capital estimates and risk factors................Ill
5.3.2. Implied cost of capital estimates and realised returns............113
5.3.3. Summary...........................................................115
5.4. Limitations..............................................................117
5.4.1. Estimating markets expected dividends earnings .................117
5.4.1.1. Analysts forecasts......................................117
5.4.1.2. Earnings derived from mechanical forecasting............118
5.4.1.3. Accounting conservatism..................................419
5.4.2. Degrees-of-freedom problem........................................120
5.4.3. Stochastic expected returns.......................................122
5.5. Conclusion ..............................................................123
6. Validating ICC estimates with realised returns: The importance of con-
sistent cash flow news 127
6.1. Preliminaries ...........................................................127
6.2. Relation between expected and realised returns ..........................130
6.2.1. Decomposition of realised returns.................................130
6.2.2. Cash flow and return news according to Easton Monahan (2005) 131
6.2.3. Discussion of Botosan et al. (2011) and counterpoints made by Ea-
ston Monahan (2016) 132
6.3. Return decomposition and cash flow news ..............................134
6.4. Development of appropriate cash flow news proxies and empirical analysis . 136
6.4.1. Developing ICC model-specific cash flow news proxies..............136
6.4.2. Data used and computation of main variables.......................139
6.4.3. Empirical results.................................................141
6.4.3.1. Descriptive statistics...................................141
6.4.3.2. Correlations.............................................143
6.4.3.3. Multivariate Analysis....................................147
6.4.4. Additional analysis and robustness checks ........................152
6.4.4.1. Focusing on cash flow news only ........................152
6.4.4.2. Applying the discount rate news specification of Botosan
et al (2011).............................................154
6.5. Application of the Easton Monahan (2005) procedure and analysts bias 156
6.6. Conclusion...............................................................160
7. Incorporating biases from conservatism in ICC approaches 163
7.1. Preliminaries ...........................................................163
XI
Contents
7.2. Conservatively biased and unbiased models................................166
7.2.1. Impact of conservative accounting on long-term growth rate .... 168
7.2.2. Conditions for biased (adjusted) long-term growth rate.............170
7.3. Empirical implementation and analysis.....................................171
7.3.1. Considerations prior to implementation.............................171
7.3.2. Models applied.....................................................173
7.3.3. Data used..........................................................174
7.3.4. Empirical results..................................................174
7.3.4.1. Sample descriptive statistics.............................174
7.3.4.2. Risk premia and long-term growth rate estimates..........176
7.3.4.3. Correlations and graphical analysis.......................181
7.3.5. Validating the implied risk premia estimates.......................184
7.3.5.1. Dependency between risk proxies and expected returns . . 184
7.3.5.2. Comparison with future realised returns..................191
7.3.5.3. Simple example on Facebook and Exxon Mobil...............200
7.4. Conclusion................................................................202
8. Conclusion and Outlook 205
Appendix 209
A. Derivations and additional formulae 211
A.l. Post-horizontal development under the residual income valuation model . .211
A.2. Post-horizontal development under the abnormal earnings growth model . 214
A.3. Derivation of conservatively biased growth rate in RIM...................215
A.4. Derivation of the conservatively biased growth rate in AEGM .............216
A.5. Models applied in the empirical parts of the thesis......................217
A.5.1. ICC based on RIM..................................................217
A.5.2. ICC based on AEGM..................................................217
A.5.3. ICC based on common heuristics....................................218
A.5.4. ICC based on portfolio-level approaches ...........................218
A. 6. Removing predictable forecast errors.....................................220
B. Additional Tables 223
B. l. Rank test portfolios based on two-digit SIC number......................223
B.2. Comparisons between expected and realised returns ......................226
B.3. Comparison between analysts’ expected growth, realised returns and risk
premia metrics ...........................................................228
XII
Contents
230
BibliograPhy
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| publisher | Simeon Ketterer |
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| spelling | Ketterer, Simeon Verfasser (DE-588)1153361051 aut Implied cost of capital and accounting conservatism analytical and empirical evidence Simeon Ketterer Bamberg Simeon Ketterer January 2018 XXVI, 252 Seiten Diagramme txt rdacontent n rdamedia nc rdacarrier Dissertation Otto-Friedrich-Universität Bamberg 2018 Kapitalkosten (DE-588)4135348-1 gnd rswk-swf Vorsichtsprinzip (DE-588)4287125-6 gnd rswk-swf Rechnungswesen (DE-588)4048732-5 gnd rswk-swf (DE-588)4113937-9 Hochschulschrift gnd-content Kapitalkosten (DE-588)4135348-1 s Rechnungswesen (DE-588)4048732-5 s Vorsichtsprinzip (DE-588)4287125-6 s DE-604 Digitalisierung UB Augsburg - ADAM Catalogue Enrichment application/pdf http://bvbr.bib-bvb.de:8991/F?func=service&doc_library=BVB01&local_base=BVB01&doc_number=030157709&sequence=000001&line_number=0001&func_code=DB_RECORDS&service_type=MEDIA Inhaltsverzeichnis |
| spellingShingle | Ketterer, Simeon Implied cost of capital and accounting conservatism analytical and empirical evidence Kapitalkosten (DE-588)4135348-1 gnd Vorsichtsprinzip (DE-588)4287125-6 gnd Rechnungswesen (DE-588)4048732-5 gnd |
| subject_GND | (DE-588)4135348-1 (DE-588)4287125-6 (DE-588)4048732-5 (DE-588)4113937-9 |
| title | Implied cost of capital and accounting conservatism analytical and empirical evidence |
| title_auth | Implied cost of capital and accounting conservatism analytical and empirical evidence |
| title_exact_search | Implied cost of capital and accounting conservatism analytical and empirical evidence |
| title_full | Implied cost of capital and accounting conservatism analytical and empirical evidence Simeon Ketterer |
| title_fullStr | Implied cost of capital and accounting conservatism analytical and empirical evidence Simeon Ketterer |
| title_full_unstemmed | Implied cost of capital and accounting conservatism analytical and empirical evidence Simeon Ketterer |
| title_short | Implied cost of capital and accounting conservatism |
| title_sort | implied cost of capital and accounting conservatism analytical and empirical evidence |
| title_sub | analytical and empirical evidence |
| topic | Kapitalkosten (DE-588)4135348-1 gnd Vorsichtsprinzip (DE-588)4287125-6 gnd Rechnungswesen (DE-588)4048732-5 gnd |
| topic_facet | Kapitalkosten Vorsichtsprinzip Rechnungswesen Hochschulschrift |
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