Estimating the equity risk premium using accounting fundamentals

O'Hanlon, J F and Steele, A (1997) Estimating the equity risk premium using accounting fundamentals. Working Paper. The Department of Accounting and Finance, Lancaster University.

Abstract

This study uses recent developments in the theoretical modelling of the links between unrecorded accounting goodwill, accounting profitability and the cost of equity, together with Capital Asset Pricing Model (CAPM) betas, to estimate the ex-ante equity risk premium in the U.K.. The results suggest that the premium is in the region of 4% to 5%. This lends support to the suggestion that the ex-ante equity risk premium is substantially less than the historical average of the excess of equity returns over the risk-free rate.