Analysts' estimates of the cost of equity capital

• 成果类型: Article
• 署名作者: Balakrishnan, Karthik; Shivakumar, Lakshmanan; Taori, Peeyush
• 署名单位: Rice University; University of London; London Business School; University of Hong Kong
• 刊物名称: JOURNAL OF ACCOUNTING & ECONOMICS
• ISSN/ISSBN: 0165-4101
• DOI: 10.1016/j.jacceco.2020.101367
• 发表日期: 2021
• 关键词: IMPLIED COST; cross-section; EARNINGS FORECASTS; Expected returns; stock returns; RISK; INVESTMENT; INFORMATION; prices; IMPACT

摘要

We explore a large sample of analysts' estimates of the cost of equity capital (CoE) to evaluate their usefulness as expected return proxies (ERP). We find that the CoE estimates are significantly related to a firm's beta, size, book-to-market ratio, leverage, and idio-syncratic volatility but not other risk proxies. Even after controlling for the popular return predictors, the CoE estimates incrementally predict future stock returns. This predictive ability is better explained as the CoE estimates containing ERP information rather than reflecting stock mispricing. When evaluated against traditional ERPs, including the implied costs of capital, the CoE estimates are found to be the least noisy. Finally, we document CoE responses around earnings announcements, demonstrating their usefulness to study discount-rate reactions of market participants. We conclude that analysts' CoE estimates are meaningful ERPs that can be fruitfully employed in a variety of asset pricing contexts. (c) 2020 Published by Elsevier B.V.