Removing predictable analyst forecast errors to improve implied cost of equity estimates

• 成果类型: Article
• 署名作者: Mohanram, Partha; Gode, Dan
• 署名单位: University of Toronto; New York University
• 刊物名称: REVIEW OF ACCOUNTING STUDIES
• ISSN/ISSBN: 1380-6653
• DOI: 10.1007/s11142-012-9219-2
• 发表日期: 2013
• 页码: 443-478
• 关键词: EARNINGS FORECASTS; DISCLOSURE LEVEL; cross-section; expected rate; returns; INFORMATION; expectations; revisions; RISK; explanation

摘要

Prior research documents a weak association between the implied cost of equity inferred from analyst forecasts and realized returns. It points to predictable errors in analyst forecasts as a possible cause. We show that removing predictable errors from analyst forecasts leads to a much stronger association between implied cost of equity estimates obtained from adjusted forecasts and realized returns after controlling for cash flow news and discount rate news. An estimate of implied risk premium based on the average of four commonly used methods after making adjustments for predictable errors exhibits strong correlations with future realized returns as well as the lowest measurement error. Overall, our results confirm the validity of implied cost of equity estimates as measures of expected returns. Future research using implied cost of equity should remove predictable errors from implied cost of capital estimates and then average across multiple metrics.