Implied cost of equity capital in earnings-based valuation model: Evidence from Korea

Abstract

We provide empirical evidence regarding the reliability of implied cost of equity capital based on the earnings-based valuation models in Korea. We find that the implied cost of equity capital is more reliable as the estimate of unobservable ex-ante cost of equity capital than the realized stock return in Korea. Furthermore, we find that the implied cost of equity capital from the residual income valuation model (Ohlson, 1995) outperforms that from the abnormal earnings growth valuation model (Ohlson and Juettner-Nauroth, 2005) in the estimation of ex-ante cost of equity capital in Korea. Our study will contribute to Korean academics by suggesting a more reliable way to derive the estimates of ex-ante cost of equity capital.