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- Publisher Website: 10.1016/j.jacceco.2020.101367
- Scopus: eid_2-s2.0-85098158907
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Article: Analysts’ Estimates of the Cost of Equity Capital
Title | Analysts’ Estimates of the Cost of Equity Capital |
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Authors | |
Keywords | Analysts Cost of equity Expected stock returns Implied cost of equity capital |
Issue Date | 2020 |
Publisher | Elsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/jae |
Citation | Journal of Accounting and Economics, 2020, v. 71 n. 2-3, p. article no. 101367 How to Cite? |
Abstract | 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 idiosyncratic 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. |
Persistent Identifier | http://hdl.handle.net/10722/293147 |
ISSN | 2023 Impact Factor: 5.4 2023 SCImago Journal Rankings: 8.337 |
ISI Accession Number ID |
DC Field | Value | Language |
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dc.contributor.author | Balakrishnan, K | - |
dc.contributor.author | Shivakumar, L | - |
dc.contributor.author | Taori, P | - |
dc.date.accessioned | 2020-11-23T08:12:30Z | - |
dc.date.available | 2020-11-23T08:12:30Z | - |
dc.date.issued | 2020 | - |
dc.identifier.citation | Journal of Accounting and Economics, 2020, v. 71 n. 2-3, p. article no. 101367 | - |
dc.identifier.issn | 0165-4101 | - |
dc.identifier.uri | http://hdl.handle.net/10722/293147 | - |
dc.description.abstract | 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 idiosyncratic 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. | - |
dc.language | eng | - |
dc.publisher | Elsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/jae | - |
dc.relation.ispartof | Journal of Accounting and Economics | - |
dc.subject | Analysts | - |
dc.subject | Cost of equity | - |
dc.subject | Expected stock returns | - |
dc.subject | Implied cost of equity capital | - |
dc.title | Analysts’ Estimates of the Cost of Equity Capital | - |
dc.type | Article | - |
dc.identifier.email | Taori, P: peeyusht@hku.hk | - |
dc.identifier.authority | Taori, P=rp02713 | - |
dc.description.nature | link_to_subscribed_fulltext | - |
dc.identifier.doi | 10.1016/j.jacceco.2020.101367 | - |
dc.identifier.scopus | eid_2-s2.0-85098158907 | - |
dc.identifier.hkuros | 319239 | - |
dc.identifier.volume | 71 | - |
dc.identifier.issue | 2-3 | - |
dc.identifier.spage | article no. 101367 | - |
dc.identifier.epage | article no. 101367 | - |
dc.identifier.isi | WOS:000644228500001 | - |
dc.publisher.place | Netherlands | - |