Properties of implied cost of capital using analystsâ€™ forecasts
AbstractWe evaluate the influence of measurement error in analystsâ€™ forecasts on the accuracy of implied cost of capital estimates from various implementations of the â€˜implied cost of capitalâ€™ approach, and develop corrections for the measurement error. The implied cost of capital approach relies on analystsâ€™ short- and long-term earnings forecasts as proxies for the marketâ€™s expectation of future earnings, and solves for the implied discount rate that equates the present value of the expected future payoffs to the current stock price. We document predictable error in the implied cost of capital estimates resulting from analystsâ€™ forecasts that are sluggish with respect to information in past stock returns. We propose two methods to mitigate the influence of sluggish forecasts on the implied cost of capital estimates. These methods substantially improve the ability of the implied cost of capital estimates to explain cross-sectional variation in future stock returns, which is consistent with the corrections being effective in mitigating the error in the estimates due to analystsâ€™ sluggishness.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Australian School of Business in its journal Australian Journal of Management.
Volume (Year): 36 (2011)
Issue (Month): 2 (August)
Contact details of provider:
Web page: http://www.agsm.edu.au
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Hwang, Lee-Seok & Lee, Woo-Jong & Lim, Seung-Yeon & Park, Kyung-Ho, 2013. "Does information risk affect the implied cost of equity capital? An analysis of PIN and adjusted PIN," Journal of Accounting and Economics, Elsevier, vol. 55(2), pages 148-167.
- Florian Esterer & David Schröder, 2014. "Implied cost of capital investment strategies: evidence from international stock markets," Annals of Finance, Springer, vol. 10(2), pages 171-195, May.
- Hou, Kewei & van Dijk, Mathijs A. & Zhang, Yinglei, 2012.
"The implied cost of capital: A new approach,"
Journal of Accounting and Economics,
Elsevier, vol. 53(3), pages 504-526.
- Larcker, David F. & So, Eric C. & Wang, Charles C.Y., 2013. "Boardroom centrality and firm performance," Journal of Accounting and Economics, Elsevier, vol. 55(2), pages 225-250.
- Sadok El Ghoul & Omrane Guedhami & Yang Ni & Jeffrey Pittman & Samir Saadi, 2012. "Does Religion Matter to Equity Pricing?," Journal of Business Ethics, Springer, vol. 111(4), pages 491-518, December.
- Jäckel, Christoph, 2013. "Model uncertainty and expected return proxies," MPRA Paper 51978, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (SAGE Publications).
If references are entirely missing, you can add them using this form.