Analysts' Earnings Forecast Errors and Cost of Equity Capital Estimates
43 Pages Posted: 19 Dec 2008 Last revised: 25 Aug 2012
Date Written: July 27, 2012
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: Suggested Citation