Effect of Characteristics of Firms on Calculated Expected Return of Composite Implied Cost of Capital (CICC)

One of the important factors in making investment decisions is paying attention to return on investment. Thus financial researchers are always looking for models to predict return on investment for future periods with greater confidence. In this regard, we can refer to Capital Asset Pricing Model (CAPM), one-factor models and multifactorial models. Until now, all of these models have faced much criticism and lost their popularity. So activists in the stock market need a better model to estimate the expected rate of return on equity. Blume and Friend first cited that realized returns are not a suitable index of expected returns. Recently following this view, Hu et al. (2012) provided a new method for calculating the expected rate of returns, that is, Composite Implied Cost of Capital (CICC). Method of CICC needs to forecast earnings and used earning forecast model proposed by Hu et al. (2012), to protect results from biased management. This method has a nonlinear structure and a long-term look to returns on investments. Finally this paper studies the relationship between expected returns of method CICC with firm characteristics. Research Questions or hypothesis: The main purpose of this study is calculate the expected rate of returns for shareholders based on the method of Composite Implied Cost of Capital (CICC) and also reviews the effect of firm characteristics (Size, book-to-market, asset growth rate and financial leverage) on return mentioned. Hypothesis states firm characteristics affect expected rate of return of CICC method significantly. The methodological approach is based on models suggested by Hou et al. The model is estimated using data of 80 companies listed in Tehran Stock Exchange during the period 1380 to 1390. Eviews 7 and Excel software and also simulated models of the expected rate of returns, and the Java programming language were used to analyze the data. The empirical evidence shows the relationship between size, book-to-market and financial leverage with expected returns of method CICC is positive and significant. Also the relationship between assets growth rate and returns mentioned is negative and significant. Findings suggest expected returns rate calculated through CICC is related significantly to characteristics of firm and means expected returns rate of method CICC is the relevant expected returns rate.