2020, Paper: "Equity capital cost plays an important role in investment strategies and asset valuation, but there is no recognized valuation model and unified model validity test method in academia so far. This paper measures the cost of equity capital of A-share listed companies in China by using five kinds of implicit capital cost valuation models widely used by domestic scholars, and tests the validity of the model from the economic and statistical perspectives. It is found that the estimated values of the five models are significantly positively correlated with the realized returns one to three years in advance. Statistical tests show that OJ, PEG and MPEG models are more effective in explaining the time series of expected returns, while OJ models are more effective in explaining the cross-sectional changes of expected returns. Therefore, OJ model can be used as an effective model to measure the cost of equity capital of A-share listed companies in China."
Non-HKS Author Website - Hong Luo