Management Forecasts and the Cost of Equity Capital: International Evidence

Posted: 9 Mar 2017

See all articles by Ying Cao

Ying Cao

The Chinese University of Hong Kong (CUHK) - School of Accountancy

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Albert Tsang

Hong Kong Polytechnic University

Yong George Yang

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: 2017

Abstract

We examine international differences in the effect of management forecasts (which we use to proxy for voluntary disclosure) on the cost of equity capital (COC) across 31 countries. We find that the issuance of management forecasts is associated with a lower COC worldwide but that the effect of management forecasts on the COC depends on country-level institutional factors. Specifically, management forecasts have a stronger effect on the COC in countries with stronger investor protection and better information dissemination and a weaker effect in countries with higher mandatory disclosure requirements. Further analyses reveal that these relations are more pronounced when management forecasts are more frequent, more precise, and more disaggregated. Overall, our findings suggest that the ability of management forecasts to reduce firms’ COC derives not only from country-level factors that enhance the credibility of their forecasts but also from factors that reflect the quality of the information environment in terms of the distribution of news and the availability and quality of alternative information. Thus, investor protection, media penetration, and mandatory disclosure requirements have an important effect on the ability of management forecasts to lower the COC.

Keywords: management forecasts, voluntary disclosure, cost of equity capital, investor protection, information dissemination

JEL Classification: M4, M40, M41, M42

Suggested Citation

Cao, Ying and Myers, Linda A. and Tsang, Albert and Yang, Yong George, Management Forecasts and the Cost of Equity Capital: International Evidence (2017). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2929301

Ying Cao (Contact Author)

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

Shatin, N.T.
Hong Kong

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Albert Tsang

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

Yong George Yang

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration ( email )

Shatin, N.T.
Hong Kong

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