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Abstract This study aims to evaluate whether the implied cost of capital (ICC) model is better than the capital asset pricing model (CAPM) in predicting the realized rate of return for infrastructure firms. We selected a sample of 49 listed companies in Brazil for the period from 2002 to 2014. The CAPM yielded a cost of capital of 11.97% per annum, while the ICC yielded 13.39% per annum, a difference of 1.42% annually. We suggest that a possible explanation for this result is the existence of systematic, non-diversifiable risk, potentially due to regulatory intervention in the business environment. Highlights • This paper aims to evaluate whether the implied cost of capital (ICC) model, in the version developed by Easton (2006), is better than CAPM to predict the realized rate of return (ROR) for infrastructure firms. We selected a sample of 49 Brazilian listed companies from 2002 to 2014. • Our findings, obtained in the pooled regression model, showed that the ICC had a positive and significant correlation with future stock returns, whereas the CAPM did not. • Robustness and Diebold–Mariano tests (1995) corroborated that the ICC is a superior predictor of actual ROR's for the sample of Brazilian utilities. [ABSTRACT FROM AUTHOR]

Copyright of Brazilian Review of Finance / Revista Brasileira de Finanças is the property of Sociedade Brasileira de Financas and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

Copyright of Revista de Ciências da Administração is the property of Universidade Federal de Santa Catarina, Departamento de Ciencias da Administracao and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

This article tests and compares three alternative models for predicting expected returns on the Brazilian stock market: 1) the Sharpe-Litner-Mossin CAPM version; 2) the Fama and French 3-factors model; 3) and the Reward Beta Model, presented by Bornholt (2007). It was used as a two-step empirical procedure methodology for models of general equilibrium: the first step to base regard the parameters of the models from time series regressions, and in the second step the regard parameters are used as explanatory variables in cross section regressions. The tests were preceded on portfolios, in agreement with Fama and French (1993) and Bornholt (2007) methodologies, and applied in two sub-samples of stocks the data of which were available from Bovespa: the within-sample covers the period 07/1995-06/2001 and the out-of-sample 07/2001-06/2006. As well as other evidence found in Brazilian market, the results to support the Fama and French 3-factors model to explain future returns, albeit without the factor that captures the book-to-market effect being significant. In this way, a two-factor model is recommended for the prediction of expected returns on the Brazilian stock market: 1) one that captures the market excess return; and 2) another that captures the size effect. [ABSTRACT FROM AUTHOR]