Cost of capital dynamics implied by firm fundamentals
By: Matthew Lyle, Charles C. Y. Wang
Contributors: Wang, Charles C.Y.; Harvard Business School
Series: Working paper / Harvard Business School -- 13-050; Working paper (Harvard Business School) -- 13-050
Publisher: Harvard Business School
Published: 2012
Place of publication: Boston ]
Language: eng
Number of pages: 37
Description: We provide a tractable stock valuation model to study the dynamics of discount rates using only two firm fundamentals: the book-to-market ratio and expected ROE. We find that the model is easily applied to a large cross section of firms and that firm-level discount rates vary over time and are highly persistent. The model can forecast stock returns up to three years into the future and tracks economic conditions. During normal or expansion periods in the economy, the dynamics of cost of capital generate an upward sloping term structure; however, in times of high economic uncertainty, the term structure flattens and can be downward sloping.
Notes: "November 2012" -- Publisher's website.

Includes bibliographical references (pages 19-21).