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  • Review of Financial Studies

Evaluating Firm-Level Expected-Return Proxies: Implications for Estimating Treatment Effects

By: Charles M.C. Lee, Eric C. So and Charles C.Y. Wang
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Abstract

We introduce a parsimonious framework for choosing among alternative expected-return proxies (ERPs) when estimating treatment effects. By comparing ERPs’ measurement-error variances in the cross section and in time series, we provide new evidence on the relative performance of firm-level ERPs nominated by recent studies. Generally, “implied-costs-of-capital” metrics perform best in time series, while “characteristic-based” proxies perform best in the cross-section. Factor-based ERPs, even the latest renditions, perform poorly. We revisit four prior studies that use ex-ante ERPs and illustrate how this framework can potentially alter either the sign or the magnitude of prior inferences.

Keywords

Implied Cost Of Capital; Expected Returns; Cost Of Capital; Investment Return; Performance Evaluation

Citation

Lee, Charles M.C., Eric C. So, and Charles C.Y. Wang. "Evaluating Firm-Level Expected-Return Proxies: Implications for Estimating Treatment Effects." Review of Financial Studies (forthcoming).
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About The Author

Charles C.Y. Wang

Accounting and Management
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More from the Authors
  • The Sustainable Corporate Governance Initiative in Europe By: Mark Roe, Holger Spamann, Jesse M. Fried and Charles C.Y. Wang
  • The EU's Unsustainable Approach to Stakeholder Capitalism By: Jesse M. Fried and Charles C.Y. Wang
  • Connecting Expected Stock Returns to Accounting Valuation Multiples: A Primer By: Akash Chattopadhyay, Matthew R. Lyle and Charles C.Y. Wang
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