Analysts’ earnings forecast errors and cost of equity capital estimates

Stephannie Larocque ()
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Stephannie Larocque: University of Notre Dame

Review of Accounting Studies, 2013, vol. 18, issue 1, No 5, 135-166

Abstract: Abstract This study investigates the relation between analysts’ forecast errors and cost of equity capital estimates implied from analysts’ earnings forecasts and price. My analysis predicts and removes forecast errors from analysts’ earnings forecasts on an out-of-sample basis and then uses these adjusted analysts’ forecasts to reverse-engineer cost of equity capital estimates. While the correction for predictable analysts’ forecast errors meaningfully lowers each of three firm-level implied COEC estimates employed in this study and commonly used in the literature, I do not find that this correction improves their association with realized returns.

Keywords: Cost of capital; Analyst forecasts; Expected returns (search for similar items in EconPapers)
JEL-codes: M4 M40 M41 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s11142-012-9207-6

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