Properties of Implied Cost of Capital Using Analysts’ Forecasts
Australian Journal of Management, Vol. 36, No. 2, 2011
26 Pages Posted: 5 May 2011 Last revised: 17 Aug 2012
There are 2 versions of this paper
Properties of Implied Cost of Capital Using Analysts’ Forecasts
Date Written: May 3, 2011
Abstract
We evaluate the influence of measurement error in analysts’ forecasts on the accuracy of implied cost of capital estimates from various implementations of the ‘implied cost of capital’ approach, and develop corrections for the measurement error. We document predictable error in the implied cost of capital estimates resulting from analysts’ forecasts that are sluggish with respect to information in past stock returns. We propose two methods to mitigate the influence of sluggish forecasts on the implied cost of capital estimates. These methods substantially improve the ability of the implied cost of capital estimates to explain cross-sectional variation in future stock returns, which is consistent with the corrections being effective in mitigating the error in the estimates due to analysts’ sluggishness.
Keywords: implied cost of capital, earnings forecasts, expected returns, analysts’ forecasts
JEL Classification: G12, M41, G29, G31, G32
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
By Christine Botosan and Marlene Plumlee
-
By Christine Botosan and Marlene Plumlee
-
By Paul M. Healy and Krishna Palepu
-
Information and the Cost of Capital
By Maureen O'hara and David Easley
-
Toward an Implied Cost of Capital
By William R. Gebhardt, Charles M.c. Lee, ...
-
Toward an Ex Ante Cost-of-Capital
By William R. Gebhardt, Charles M.c. Lee, ...
-
The World Price of Insider Trading
By Utpal Bhattacharya and Hazem Daouk
-
The Market Pricing of Earnings Quality
By Jennifer Francis, Ryan Lafond, ...