Analysts' Earnings Forecast Errors and Cost of Equity Capital Estimates

43 Pages Posted: 19 Dec 2008 Last revised: 25 Aug 2012

Stephannie Larocque

University of Notre Dame - Mendoza College of Business

Date Written: July 27, 2012

Abstract

This study investigates the relation between analysts’ forecast errors and cost of equity capital estimates implied from analysts’ earnings forecasts and price. My analysis predicts and removes forecast errors from analysts’ earnings forecasts on an out-of-sample basis and then uses these adjusted analysts’ forecasts to reverse-engineer cost of equity capital estimates. While the correction for predictable analysts’ forecast errors meaningfully lowers each of three firm-level implied COEC estimates employed in this study and commonly used in the literature, I do not find that this correction improves their association with realized returns.

Keywords: analyst forecasts, cost of capital, expected returns

JEL Classification: M41, M45, G12, G29

Suggested Citation

Larocque, Stephannie, Analysts' Earnings Forecast Errors and Cost of Equity Capital Estimates (July 27, 2012). Review of Accounting Studies, Vol. 18, No. 1, 2013. Available at SSRN: https://ssrn.com/abstract=1317509 or http://dx.doi.org/10.2139/ssrn.1317509

Stephannie A. Larocque (Contact Author)

University of Notre Dame - Mendoza College of Business ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

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