Management Forecasts and the Cost of Equity
44 Pages Posted: 11 Sep 2009
Date Written: September 9, 2009
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: Suggested Citation