Comparing results of the implied cost of capital and capital asset pricing models for infrastructure firms in Brazil.

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]