Title: The implied cost of equity capital in the Jordanian industrial and service companies

Authors: Ayman E. Haddad; Naser M. Abughazaleh; Osama M. Al-Hares

Addresses: College of Business and Economics, American University of Kuwait, P.O. Box 3323, Safat 13034, Kuwait ' College of Business Administration, Gulf University for Science and Technology, P.O. Box 7207, Hawally 32093, Kuwait ' College of Business Administration, Gulf University for Science and Technology, P.O. Box 7207, Hawally 32093, Kuwait

Abstract: This study estimates the implied cost of equity capital of the Jordanian companies listed at the Amman Stock Exchange using the residual income valuation model suggested by Gebhardt, Lee, and Swaminathan (GLS) (2001). The results show that the implied cost of equity capital computed from the GLS approach produces a mean of ex-ante cost of equity capital of 9.6% for the Jordanian companies listed at the ASE. We also examine whether the Jordanian firms' cost of equity capital, based on the residual income model, is a more reliable measure of cost of equity than the realised stock returns, by investigating the association between the cost of equity capital (or realised returns) and firm-specific risk proxies. We find that the implied cost of equity capital is associated significantly with all risk proxies in the predicted directions, while the realised stock returns show a significant association only with the size of the firms and market beta. We also find that the adjusted R² of the regression of the implied cost of equity capital on the risk proxies is higher than that of the realised stock returns. We conclude that the implied cost of equity capital derived from the residual income valuation model is a more reliable measure for the ex-ante cost of equity capital than that of the realised stock returns in terms of the association with firm-specific risk proxies.

Keywords: realised stock returns; implied cost of equity capital; residual income model; stock evaluation; risk proxies; Amman Stock Exchange; Jordan.

DOI: 10.1504/IJAF.2014.058108

International Journal of Accounting and Finance, 2014 Vol.4 No.3, pp.240 - 260

Received: 16 Apr 2012
Accepted: 09 Apr 2013
Published online: 21 Jun 2014 *

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