Implied cost of equity (ICC) GLS model
The ICC model of Gebhardt, Lee, Swaminathan (2001) is the most challenging model in terms of coding and practical implementation. The model forecasts the model parameters such as earnings and the book value of equity, etc. up to 12 periods ahead and then compute the implied cost-of-capital (equity) for each firm as the internal rate of return that equates the present value of expected future cash flows to the current stock price. The model is given below:
Our Stata Code
We have developed easy to use, yet robust code for estimating the implied cost of equity using the GLS model. Further, our comments on each line of code will surely help you to not only apply the code but also understand the process more clearly. It is important to note that there are several Mata based codes that are freely available on the Statalist, however, those codes have several errors and generally produce extremely low ICC rates due to incorrect linear interpolation and forecasting the model parameters. In contrast, our code produces very similar results as reported in the GLS paper.
The code is available for $ 100 , plus a $50 for raw data processing (in case the data is not in Stata format and variables are not already constructed). For further details, please contact us at:
Gebhardt, W., Lee, C.M., Swaminathan, B., 2001. Toward an implied cost of capital. Journal of Accounting Research 39, 135–176.
Calculate implied cost of equity capital using Gebhardt et al. (2001) model