The Timeliness of Analysts' Earnings Forecasts and the Cost of Capital PDF Download
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Author: Andrew B. Jackson
Publisher:
ISBN:
Category :
Languages : en
Pages : 26
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Book Description
We empirically examine the associations between the cost of capital and the timeliness of analysts' earnings forecasts, as a proxy for disclosure precision. We document that as the precision of the information increases so does the cost of capital, consistent with prior research showing more timely disclosures are positively associated with the cost of capital, and that the precision of disclosure widens the information gap between informed and uninformed investors in an imperfect market. We also find that at a certain point, more timely analysts' forecasts are not positively associated with the cost of capital, although the relation is mixed.
Author: Andrew B. Jackson
Publisher:
ISBN:
Category :
Languages : en
Pages : 26
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Book Description
We empirically examine the associations between the cost of capital and the timeliness of analysts' earnings forecasts, as a proxy for disclosure precision. We document that as the precision of the information increases so does the cost of capital, consistent with prior research showing more timely disclosures are positively associated with the cost of capital, and that the precision of disclosure widens the information gap between informed and uninformed investors in an imperfect market. We also find that at a certain point, more timely analysts' forecasts are not positively associated with the cost of capital, although the relation is mixed.
Author: Peter Easton
Publisher: Now Publishers Inc
ISBN: 1601981945
Category : Business & Economics
Languages : en
Pages : 148
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Book Description
Estimating the Cost of Capital Implied by Market Prices and Accounting Data focuses on estimating the expected rate of return implied by market prices, summary accounting numbers, and forecasts of earnings and dividends. Estimates of the expected rate of return, often used as proxies for the cost of capital, are obtained by inverting accounting-based valuation models. The author describes accounting-based valuation models and discusses how these models have been used, and how they may be used, to obtain estimates of the cost of capital. The practical appeal of accounting-based valuation models is that they focus on the two variables that are commonly at the heart of valuations carried out by equity analysts -- forecasts of earnings and forecasts of earnings growth. The question at the core of this monograph is -- How can these forecasts be used to obtain an estimate of the cost of capital? The author examines the empirical validity of the estimates based on these forecasts and explores ways to improve these estimates. In addition, this monograph details a method for isolating the effect of any factor of interest (such as cross-listing, fraud, disclosure quality, taxes, analyst following, accounting standards, etc.) on the cost of capital. If you are interested in understanding the academic literature on accounting-based estimates of expected rate of return this monograph is for you. Estimating the Cost of Capital Implied by Market Prices and Accounting Data provides a foundation for a deeper comprehension of this literature and will give a jump start to those who have an interest in these topics. The key ideas are introduced via examples based on actual forecasts, accounting information, and market prices for listed firms, and the numerical examples are based on sound algebraic relations.
Author: Wayne R. Guay
Publisher:
ISBN:
Category :
Languages : en
Pages : 26
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Book Description
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. The implied cost of capital approach relies on analysts' short- and long-term earnings forecasts as proxies for the market's expectation of future earnings, and solves for the implied discount rate that equates the present value of the expected future payoffs to the current stock price. 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.
Author: Christina Dargenidou
Publisher:
ISBN:
Category :
Languages : en
Pages : 33
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Book Description
This study focuses on the relation between the cost of equity capital and earnings expectations when the properties of accounting that determine earnings vary across different regulatory regimes. More particularly, it addresses the European setting where different types of GAAP regime have continued to function in the presence of the gradual harmonization of the underlying legal framework, and where the adoption of internationally recognised accounting standards by certain firms has anticipated the requirement for International Financial Reporting Standards. On the basis of estimates of the cost of equity that are implied by analysts' earnings forecasts, the paper provides evidence that financial market integration may have already contributed to mitigating the economic consequences of accounting diversity, and that switching to IFRS could have a short lived impact on capital markets. Moreover, based on firm level transparency and disclosure rankings provided by Standard and Poor's, it is shown how the quality of financial reporting conditions the implied cost of equity under different GAAP.
Author: Michael B. Clement
Publisher:
ISBN:
Category :
Languages : en
Pages : 40
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Book Description
This study examines the market response to confirming forecasts. Confirming management forecasts are voluntary disclosures by management that corroborate existing market expectations about future earnings. The study of confirming forecasts is important because it can provide evidence on the relation between voluntary disclosure and cost of capital. We find that the market's reaction to confirming forecasts is significantly positive, indicating that benefits may accrue to firms that disclose such forecasts. In addition, while we find no significant change in the mean consensus forecasts (a proxy for earnings expectations) around the confirming forecast date, evidence indicates a significant reduction in the mean and median consensus analyst dispersion (a proxy for earnings uncertainty). Finally, we document a positive association between reduction of dispersion of analysts' forecasts and the magnitude of the stock market response.
Author: Ilan Guttman
Publisher:
ISBN:
Category :
Languages : en
Pages : 48
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Book Description
Existing literature assumes that the order and timing of analysts' earnings forecasts are determined exogenously. However, analysts choose when to issue their forecasts. This study develops a model that endogenizes the timing decision of analysts and analyzes their equilibrium timing strategies. In the model, analysts face a trade-ocurren; between the timeliness and the precision of their forecasts. The model introduces a timing game with two analysts, derives and analyzes its unique pure strategies equilibrium, and provides new empirical predictions about the precision and timing of analysts' forecasts. The equilibrium has one of two patterns: either the times of the analysts' forecasts cluster, or there is a separation in the times of the forecasts. The less informed and less similar the analysts are, the more likely it is that they forecast at different points in time. All else equal, analysts with a higher precision of initial private information tend to forecast earlier, and analysts with a higher learning ability tend to forecast later.
Author: Michalis Makrominas
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Implied cost of capital estimates are typically calculated using analysts' forecasts as proxies for the market's earnings expectations. We examine the case where deviations between investors' expectations and analysts' beliefs, as manifested by analysts' recommendations, cause predictable variation in implied cost of capital. We find that stocks recommended by analysts as Buy or Strong Buy have, ceteris paribus, higher implied cost of capital than stocks recommended as Underperform or Sell, and that the effect is more clearly pronounced in stocks that have been downgraded. We attribute the effect to differential expectations between analysts and investors regarding future profitability, rather than differential expectations regarding systematic risk. We demonstrate that adjusting analysts' earnings forecasts in line with the market's earnings expectations largely eliminates the observed variation, indicating that such corrective mechanisms could and should be incorporated in the estimation of implied cost of capital.
Author: Choi, Mun Soo
Publisher:
ISBN:
Category :
Languages : en
Pages : 25
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Book Description
Author: Lise Newman Graham
Publisher:
ISBN:
Category : Corporate profits
Languages : en
Pages : 334
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Book Description
Author: Jennifer Francis
Publisher:
ISBN:
Category :
Languages : en
Pages : 43
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Book Description
We examine the relation between the cost of equity capital and seven attributes of earnings: quality, persistence, predictability, smoothness, value relevance, timeliness and conservatism. We refer to the first four attributes as accounting-based because measures of these constructs are typically based on accounting information only. We refer to the last three attributes as market-based because proxies for these constructs are typically based on relations between market data and accounting data. Our analysis of the cost of capital effects of these attributes is based on two distinct approaches to measuring the cost of capital: a cross-sectional approach which uses ex ante cost of capital estimates derived from analyst forecast data, and a time-series approach that uses realized returns and asset pricing regressions. Across both sets of tests, we find that firms with the most favorable values of each attribute, viewed individually, enjoy significantly lower costs of capital than firms with the least favorable values. The largest cost of capital effects are found for the accounting-based attributes; within this set, earnings quality has the strongest effects. Among the market-based attributes, value relevance dominates timeliness and conservatism. Considering all attributes together, the results show that investors consistently price earnings quality and earnings persistence, and to a lesser extent, value relevance.
