Existing literature employs two general approaches to assess the validity of alternative proxies for firm-specific cost of equity capital or expected return (hereafter Et)1(rt)). The first approach involves examining the association between the proxy for Et)1(rt) and future realized returns. The second approach focuses on the association between the Et)1(rt) proxy and contemporaneous risk characteristics of firms. The results of these two streams of literature are mixed. Easton and Monahan (2005) (hereafter EM) and Guay, Kothari, and Shu (2005) (hereafter GKS) focus on the association between alternative proxies for Et)1(rt) and future realized returns and conclude that none of the proxies they examine provide valid estimates of the construct of interest. In contrast, Botosan and Plumlee (2005) (hereafter BP) conclude that two common proxies for Et)1(rt) — rDIV (Botosan and Plumlee 2002) and rPEG (Easton 2004) — are valid, based on their finding that both are associated with firm-specific risk characteristics in a theoretically predictable and stable manner. Furthermore, Pastor, Sinha, and Swaminathan (2008) document a positive association between market-level implied cost of capital and risk as measured by the volatility of market returns, consistent with the estimates capturing time-varying Et)1(rt). In this paper, our goal is to reconcile the conflict between these two streams of literature and provide additional evidence pertaining to the construct validity of the proxies employed in extant research. Contrary to the results documented in EM and GKS, we document a positive association between ten of the twelve Et)1(rt) proxies included in our study and future realized returns after controlling for new information. 1 We reconcile our findings to those in EM and GKS by demonstrating that the prior results are due to empirical misspecification. Finally, we show that two of the proxies, rDIV and rPEG, demonstrate not only the expected relation with future realized returns, but also with firm-specific risk. We also address several other issues regarding the use of implied cost of capital estimates including: (1) analysts’ forecast bias, (2) the efficacy of realized returns for Et)1(rt) before and after controlling for news, (3) the effectiveness of averaging several Et)1(rt) proxies, and (4) the substitution of realized values for analysts’ forecasts of cash flows or earnings. Our evidence suggests that deviations between analysts’ expectations and those of the market lead to potentially less powerful proxies but do not generate biased or * Accepted by Steven Salterio. We gratefully acknowledge the financial support of the David Eccles School of Business. We also wish to thank Kin Lo, K. Ramesh, Matt Magilke, and the workshop participants at the