Management Forecasts and the Cost of Equity

44 Pages Posted: 11 Sep 2009

See all articles by Mei Feng

Mei Feng

University of Pittsburgh - Katz Graduate School of Business

Chan Li

University of Kansas

Zhaoyang Gu

Chinese University of Hong Kong - School of Accountancy

Date Written: September 9, 2009

Abstract

Francis et al. (2008) find the surprising result that management forecasts are positively associated with firms’ cost of equity. We re-examine the relationship between the two by separating different attributes of management forecasts and looking into cross-sectional variation in the relationship. We find that the cost of equity is negatively associated with management forecast quality (forecast specificity, accuracy and credibility), but not robustly related to management forecast quantity (frequency), after controlling for earnings quality and other factors. The effect of forecast quality is stronger for smaller firms and firms with lower analyst following. These results are consistent with the theoretical prediction that voluntary disclosure reduces the cost of equity, but primarily for firms with relatively poor information environments.

Keywords: Management Forecasts, Management Forecast Accuracy, Management Forecast Specificity, Cost of Equity

JEL Classification: M40, M51, G12

Suggested Citation

Feng, Mei and Li, Chan and Gu, Zhaoyang, Management Forecasts and the Cost of Equity (September 9, 2009). Available at SSRN: https://ssrn.com/abstract=1471058 or http://dx.doi.org/10.2139/ssrn.1471058

Mei Feng (Contact Author)

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States

Chan Li

University of Kansas ( email )

Capitol Federal Hall
Lawrence, KS 66045
United States
7857661277 (Phone)
66045 (Fax)

Zhaoyang Gu

Chinese University of Hong Kong - School of Accountancy ( email )

Shatin, N.T.
Hong Kong

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