Abstract
Purpose – This paper examines the ability of Lyle, Callen, and Elliott's (2013) valuation accounting model in estimating expected returns (cost of capital) in the Brazilian capital market. Design/methodology/approach – To test the model's ability to generate expected returns (cost of capital), as well as to predict prices, Fama-Macbeth's (1973) monthly cross-sectional regressions were used. Sensitivity to different risk factors, particularly to the whole (systematic) economy risk, was also tested to forecast returns using a two-stage approach. Findings – The results showed that even under different conditions, the accounting model evaluated has unsatisfactory performance with emerging country data, during the analysis period. Moreover, the sensitivity of return to the risk factors employed was not a determinant for the forecasts. However, the findings showed consistency for price forecasting, and the evidence was consistent with the work applied in the American market. Originality/value – For the Brazilian case, the model failed to capture the dynamics of asset returns, showing that the capital market under analysis has its own characteristics and requires a methodology that considers this.
Highlights
This paper examines the capacity of the accounting-based valuation model of Lyle, Callen, and Elliott (2013) to predict returns in the Brazilian capital market
LCE argues that the estimates generated by the Capital Asset Pricing Model (CAPM) and FF may not be adequate for calculating expected return since they do not include information on risk expectations or future states of the economy
The authors tested data from firms listed in the American stock market, and until now, there have been no studies that empirically verify how well the model captures the dynamics of shares of Brazilian firms
Summary
This paper examines the capacity of the accounting-based valuation model of Lyle, Callen, and Elliott (2013) to predict returns (cost of capital) in the Brazilian capital market. The study by Ang et al (2006) demonstrates that companies with more negative coefficients with regard to changes in aggregate risk measured by the Volatility Index (VIX) produce high future stock returns They show that the sensitivity to aggregate risk in the entire economy is negatively related to returns, while LCE theoretically reveals this negative relationship. The main results showed that the LCE model is not well suited for forecasting returns in the Brazilian capital market, based on the sample and period researched.
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