Cost of Capital and Valuation Workshop


Speaker:Prof. David Ashton (Bristol), Mr. Chris Bailey (Financial Orbit), Prof. Colin Clubb (KCL), Prof. Peter Pope (LSE), Prof. Andrew Vivian (Loughborough), Dr. Matthew Warren (KPMG)
Date: Thursday 7 December 2017
Time: 09:15 - 17.00
Location: The Bateman Lecture Theatre, Building: one

Further details

On behalf of The Firms, Markets and Value (FMV) Cluster, Prof. Pengguo Wang, Dr. Rajesh Tharyan and Dr. Christina Dargenidou at Xfi are organising a workshop on Cost of Capital and Valuation on Thursday 7th December from 9:15am - 5pm in Bateman Lecture Theatre, Building: one, University of Exeter Business School

Academic research on cost of capital in both finance and accounting has been advanced in the last few years. For example, Fama-French have extended their 3-factor model to the 5-factor model. Hou, Xie and Zhang have developed a so-called q-model. Accounting literature has also advanced in estimating the so-called implied cost of capital. We have invited 4 leading academics in this field to deliver their recent findings. We also have invited two practitioners from KPMG and Financial Orbit to address how they use cost of capital in practical asset valuation. We would also like to use this opportunity to mark the end of our ESRC project on the cost of capital. The project was led by Alan Gregory, who is now an Emeritus Professor of finance.  The speakers and titles of their talks are listed below.


All are welcome. For catering purposes, please can you let Lauren Witkin ( know and confirm your attendance.

Guest speakers

Speaker Paper/Presentation

Prof. David Ashton (Bristol)

David Ashton is Emeritus Professor of Accounting and Finance at the University of Bristol. He has undergraduate degrees in Physics (Oxford), Mathematics (Open University), a Masters in Operations Research (Lancaster) and a PhD in Business (Warwick), before qualifying as a member of the Institute of Cost and Management Accounting.

He previously worked as an operational research analyst with CWS before becoming an academic. Since then has held appointments at the Universities of Lancaster, Bath, UBC (Vancouver), Manchester and Bristol. He has published widely in leading Accounting and Finance Journals. His current research interests focus on the cost of capital for which he has previously acted as a consultant for several leading organisations.

Factor Analysis and the Accrual Anomaly

Abstract: In this paper, we develop a theoretical structure for a factor model of asset pricing. Our model identifies the relationship between covariance terms and accounting fundamentals such as earnings, book values, accruals, investment and profitability in estimating stock returns. We show that the cost of equity capital in theory can be expressed purely in terms of price scaled ratios related to accounting fundamentals or via covariance structures as in the CAPM. We argue that existing factor models are combinations of these two apparently distinct approaches and demonstrate how our analysis to the determination of factors can be generalized. We identify and clarify the role played by book-to-market in factor models. An additional feature of our analysis is the treatment of accruals, where we argue that scaled accruals from their long run means, rather than accruals per se provide the appropriate risk factor. This suggests that the ‘accrual anomaly’ can be explained rationally. We re-interpret recent research on the accrual anomaly and show that it is consistent with a rational pricing of accruals.

Mr. Chris Bailey (Financial Orbit)

Chris Bailey has over 20 years of investment industry experience at long-only and long-short institutions as a global multi-asset fund manager, strategist/macro thinker and, in the earlier part of his career, as a securities and fund analyst. He strongly believes in the importance of the fusion of top-down and bottom-up analysis taking a view that an understanding of both aspects is the only way to get a full view of global opportunities across equity, bond and alternative investment markets.

Prior to founding the global investment research and consultancy firm Financial Orbit Limited, Chris worked for a London based fund management group and headed the team for a range of globally directly invested mutual funds, personally running the Growth, Balanced and Conservative funds (collectively c. US$2bn of assets) all of which outperformed their benchmarks.

Great investors and the cost of capital

Prof. Colin Clubb (KCL)

Analysing the relationship between implied cost of capital metrics and realised stock returns

Abstract: We extend the analytical framework linking realised stock returns and ICC estimates based on Vuolteenaho (Journal of Finance 57, 233-264, 2002) and Easton and Monahan (Accounting Review 80, 501-538, 2005) in order to: (i) take account of the impact of market news on the association between the ICC and realised stock returns; (ii) provide an alternative measure of discount rate news; and (iii) take account of the expected theoretical difference between the implied cost of capital and the expected rate of return. Our empirical results, based on both cross-sectional and time-series analysis and employing an adjustment for analyst earnings forecast error, are generally consistent with the implications of our analytical framework. Specifically, our cross-sectional regression results (a) provide robust support for a coefficient close to one for most ICC estimates after taking account of market news, (b) provide cash flow news and discount rate news coefficient estimates close to one, and (c) provide evidence for the role of a growth/leverage based variable as a control for the expected difference between the ICC and expected stock returns. Time-series results for individual firms confirm strong mean reversion in ICC estimates as assumed in our analytical framework and provide strong corroborative evidence for a positive association between market new adjusted implied risk premiums and realised returns. Overall, our paper provides further robust support for the relevance of realised returns as a benchmark for establishing the usefulness of ICC measures which are broadly consistent with theoretical expectations.

Prof. Peter Pope (LSE)

Peter F. Pope is Professor of Accounting at the London School of Economics and Political Science. His research focuses on capital markets and international equity valuation, with particular reference to the role of fundamentals in pricing and the analysis of securities risk. He has published extensively in leading journals including The Journal of Finance, Journal of Banking and Finance, The Accounting Review, Journal of Accounting Research, Review of Accounting Studies and Contemporary Accounting Research, and in many other international accounting and finance journals.

He has served as the Academic Coordinator of the Institute of Quantitative Investment Research since 1991 and is a consultant to a number of firms in the investment management industry. He holds PhD and MA degrees awarded by Lancaster University and a BSc from Liverpool University; he is also a qualified accountant.

The cost of capital and fundamentals: Recent advances

Prof. Andrew Vivian (Loughborough)

Andrew Vivian is a Professor of Finance at Loughborough University. His research interests include investments, empirical finance, commodities and market efficiency. He has published articles in various finance journals, including Energy Economics, European Journal of Finance, International Journal of Forecasting, International Review of Financial Analysis, Journal of Business Finance and Accounting, Journal of Empirical Finance, Journal of International Money and Finance, and Journal of International Financial Markets, Institutions and Money.

Andrew serves as an Associate Editor at the European Journal of Finance and as an Editor at Cogent Economics and Finance. He also organised two conferences: i) the British Accounting and Finance Association Northern Group Annual meeting in September 2016 and ii) Forecasting Macroeconomic and Financial Time Series in July 2014. Andrew has been a member of the programme committee for the Southern Finance Association (US) Annual Conference since 2009. Andrew also acts as a referee for numerous journals of international esteem.

Global Factors and Equity Market Valuations? Do Country Characteristics Matter?

Abstract: This paper examines the relationship between equity market valuations (dividend-price ratio) using a dynamic factor model. The factor model decomposes each country’s market valuation into a global, region-specific and country-specific component. We find that the amount of variation explained by the factors is related to economic development indicators. Specifically, the valuations in the most developed (emerging) countries are primarily driven by the global (local) component of valuation ratios.

Dr. Matthew Warren (KPMG)

Over the last 17 years, Matthew has developed extensive experience in providing valuation services in a wide range of commercial contexts, including mergers and acquisitions, divestitures, regulatory and financial reporting, reorganisations and tax valuations and has workedacross many sectors. Matthew has provided advice to major public and private clients including AnaCap, Aviva, BAE Systems, BAT, BP, BT, Bank of New York Mellon, Cable & Wireless, Capita, CPPIB, Diageo, DP World, Experian, HSBC, Lloyds Banking Group, Man Group, Morgan Stanley, Qatar Investment Authority, QinetiQ, RBS, UPS and Vodafone.

He leads teams that value a wide range of asset classes, including intangible, tangible, real estate and financial instruments. He has led and worked on many cross-border assignments including in Australia, China, Czech Republic, Dubai, Germany, Hong Kong, India, Italy, Malaysia, Norway, Netherlands, Romania, Russia, Singapore, the UK and US.

Matthew has also presented on the topic of valuations (most recently at Infoline’s 2017 Annual Practitioners’ Forum on Valuation & Pricing for Buy-Side Firms) and has been published on the subject (including in Funds Europe, Private Equity Manager and Voltaire Valuation Risk Handbook).

 Undertaking Valuations in a commercial context

Business valuation is increasingly coming under scrutiny from regulators and investors alike. This presentation will discuss some of the commercial challenges faced by valuaation practitioners today. It will cover several areas where valuation specialists are seeing increasing challenge in the marketplace, including dealing with differing interpretations on the definition of value, typical valuation techniquies adopted in commercial valuation today and key challenges in deriving discount rates in volatile macro-economic environments.