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Analyst versus model‐based earnings forecasts: implied cost of capital applications

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  • Alexander P. Paton
  • Damien Cannavan
  • Stephen Gray
  • Khoa Hoang

Abstract

We find that a composite implied cost of capital (ICC) estimate – based on the earnings forecasts generated by cross‐sectional models – is highly correlated with future realised returns in both portfolio‐ and regression‐based tests. By contrast, we find very little evidence for an association with future realised returns for an ICC estimate based on analyst earnings forecasts. We also document the time‐varying nature of expected returns and risk premia, and provide up‐to‐date estimates of an implied Australian market risk premium.

Suggested Citation

  • Alexander P. Paton & Damien Cannavan & Stephen Gray & Khoa Hoang, 2020. "Analyst versus model‐based earnings forecasts: implied cost of capital applications," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 4061-4092, December.
    • Handle: RePEc:bla:acctfi:v:60:y:2020:i:4:p:4061-4092
    DOI: 10.1111/acfi.12548
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