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• Working Paper | HBS Working Paper Series | 2013

  Measurement Errors of Expected Returns Proxies and the Implied Cost of Capital

  Charles C.Y. Wang

  This paper presents a methodology to study implied cost of capital's (ICC) measurement errors, which are relatively unstudied empirically despite ICCs' popularity as proxies of expected returns. By applying it to the popular implementation of ICCs of Gebhardt, Lee, and Swaminathan (2001) (GLS), I show that the methodology is useful for explaining the variation in GLS measurement errors. I document the first direct empirical evidence that ICC measurement errors can be persistent, can be associated with firms' risk or growth characteristics, and thus confound regression inferences on expected returns. I also show that GLS measurement errors and the spurious correlations they produce are driven not only by analysts' systematic forecast errors but also by functional form assumptions. This finding suggests that correcting for the former alone is unlikely to fully resolve these measurement-error issues. To make robust inferences on expected returns, ICC regressions should be complemented by realized-returns regressions.

  Citation:

  Wang, Charles C.Y. "Measurement Errors of Expected Returns Proxies and the Implied Cost of Capital." Harvard Business School Working Paper, No. 13–098, May 2013.

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• Article | Journal of Financial Economics | 2013

  Learning and the Disappearing Association Between Governance and Returns

  Lucian A. Bebchuk, Alma Cohen and Charles CY Wang

  The correlation between governance indices and abnormal returns documented for 1990–1999 subsequently disappeared. The correlation and its disappearance are both due to market participants' gradually learning to appreciate the difference between good-governance and poor-governance firms. Consistent with learning, the correlation's disappearance was associated with increases in market participants' attention to governance; market participants and security analysts were, until the beginning of the 2000s but not subsequently, more positively surprised by the earning announcements of good-governance firms; and, although governance indices no longer generated abnormal returns during the 2000s, their negative association with firm value and operating performance persisted.

  Keywords: Corporate Governance; Investment Return; Operations; Performance; Value; Learning; Business Earnings; Behavioral Finance;

  Citation:

  Bebchuk, Lucian A., Alma Cohen, and Charles CY Wang. "Learning and the Disappearing Association Between Governance and Returns." Journal of Financial Economics 108, no. 2 (2013): 323–348.

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• Teaching Note | HBS Case Collection | 2013

  Danaher Corporation (TN)

  David Collis

  Citation:

  Collis, David. "Danaher Corporation (TN)." Harvard Business School Teaching Note 713-412, April 2013.

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