The Implied Cost of Capital: An Empirical Assessment in the Tunisian Context

  •  Mohamed Mahjoubi    
  •  Ezzeddine Abaoub    
  •  Fethi Belhaj    


This research is a feedback to Wang (2015) suggesting that realized returns should be used in conjunction with ICCs to make more robust inferences about expected returns. We examine the validity of six firm-specific ICCs along with a synthetic one, in the Tunisian context, according to their feasibility and their correlation with realized return. The examined estimators are calculated according to three types of earnings forecasts: smoothing, random walk and cross-section. These estimators represent three main valuation approaches: Present Value of Expected Dividend (PVED), Residual Income Valuation Model (RIV) and Abnormal Earnings Growth (AEG). Our results confirm the assertions of Gerakos and Gramacy (2013) on random walk forecasts’ good performance as well as those of Li and Mohanram (2014) on the poor quality of Hou et al. (2012)’s cross-section forecasts. Furthermore, dividend seems best reflecting Tunisian stock market expectations concerning future revenues which would be generated by the valuated asset. These findings bring into question the relevance of new accounting valuation approaches which are anchored rather on equity book value (RIV) and on earnings forecasts (AEG).

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