Superior returns and capital market efficiency implications for investment

Although the concepts of efficiency have been extensively researched, an efficient stock market has remained elusive. The subject is of particular concern in India now because of the increasing dependence on the capital market for financing industrial growth. S K Barua and V Raghunathan presented two articles in Vikalpa (July-September 1986 and July-September 1987) arguing that the Indian capital market was inefficient. Using Reliance share prices, they tried to demonstrate that schemes yielding returns unrelated to risk existed. Srinivasan and Narasimhan in this article question the methodology used by Barua and Raghunathan and elaborate on the concepts of risk-return parity and efficiency, drawing a distinction between information efficiency and market efficiency.

Download Full-text

Resolving the Reliance on Fixed Estimation Dates in the Implied Cost of Equity Capital Approach

Journal of Business Valuation and Economic Loss Analysis ◽

10.1515/jbvela-2017-0009 ◽

2018 ◽

Vol 14 (1) ◽

Author(s):

Jan A. Kempkes ◽

Andreas Wömpener

Keyword(s):

Market Efficiency ◽

Capital Market ◽

Equity Capital ◽

Residual Income ◽

Fiscal Year ◽

Practical Implementation ◽

Cost Of Equity Capital ◽

Cost Of Equity ◽

Expected Cost ◽

Residual Income Valuation

Abstract Our study’s objective is to develop and analyze a dynamic approach for estimating firms’ expected cost of equity capital. We contribute to the literature by enabling the usage of any required estimation date, resolving the major shortcoming of the existing models—their reliance on one fixed estimation date. This paper presents our model and discusses it from the perspective of the extant body of literature. We show that the current state of the art approach in dynamic estimation does not satisfy theoretical and practical demands, and offers scope for significant improvements. We conduct our analysis by specially considering capital market efficiency, the consistent appreciation of cash flows with respect to timing, and straightforward practical implementation for researchers and practitioners. Building on semi-strong capital market efficiency, the analysis reveals further insights into residual income valuation as we demonstrate that any realization of residual income in the course of the year is irrelevant to valuation in the absence of dividend realization. Consequently, assumptions regarding the shape of earnings in the course of the year are also irrelevant to valuation. Additionally, our theoretically founded model conveniently facilitates the undistorted incorporation of different fiscal year-ends in large samples and avoids stale measures of expected cost of equity capital.

Download Full-text