Does duration of competitive advantage drive long-term returns in the stock market?
DOI:
https://doi.org/10.1590/1808-057x202113660Keywords:
stock market, return on equity (ROE), implied cost of capital, long-term returns, competitive advantageAbstract
The purpose of this article was to develop a new indicator to estimate the aggregate long-term expected return on stocks. There
is not a widely used method to model directly the aggregated expected return of the stock market. Most current methods use
indirect approaches. We developed a new indicator that does not need an econometric model to generate expected returns
and provides an estimate of the long-term expected returns. The proposed methodology can be used to develop an indicator
of future returns of the stock market similar to the yield-to-maturity used for bonds. We used a restricted one-stage constantgrowth
model – a variant of the residual income model (RIM) – whose main input is the duration of companies’ competitive
advantage and cyclical adjusted real return on invested capital (ROIC) with a 10-year average. We used a new methodology
to develop an indicator of the long-term expected return on the equity market at the aggregate level, considering the duration
of the competitive advantage of companies. Our results showed a strong correlation between the estimated implied return
on equity (IRE) of current stock prices and realized returns of the 10-year real total return of the index.
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