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Costs Of Capital And Earnings Attributes
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Book Synopsis Costs of Capital and Earnings Attributes by : Jennifer Francis
Download or read book Costs of Capital and Earnings Attributes written by Jennifer Francis and published by . This book was released on 2003 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Book Synopsis Estimating the Cost of Capital Implied by Market Prices and Accounting Data by : Peter Easton
Download or read book Estimating the Cost of Capital Implied by Market Prices and Accounting Data written by Peter Easton and published by Now Publishers Inc. This book was released on 2009 with total page 148 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Book Synopsis Cost of Capital by : Shannon P. Pratt
Download or read book Cost of Capital written by Shannon P. Pratt and published by John Wiley & Sons. This book was released on 2014-03-12 with total page 1344 pages. Available in PDF, EPUB and Kindle. Book excerpt: A one-stop shop for background and current thinking on the development and uses of rates of return on capital Completely revised for this highly anticipated fifth edition, Cost of Capital contains expanded materials on estimating the basic building blocks of the cost of equity capital, the risk-free rate, and equity risk premium. There is also discussion of the volatility created by the financial crisis in 2008, the subsequent recession and uncertain recovery, and how those events have fundamentally changed how we need to interpret the inputs to the models we use to develop these estimates. The book includes new case studies providing comprehensive discussion of cost of capital estimates for valuing a business and damages calculations for small and medium-sized businesses, cross-referenced to the chapters covering the theory and data. Addresses equity risk premium and the risk-free rate, including the impact of Federal Reserve actions Explores how to use Morningstar's Ibbotson and Duff Phelps Risk Premium Report data Discusses the global cost of capital estimation, including a new size study of European countries Cost of Capital, Fifth Edition puts an emphasis on practical application. To that end, this updated edition provides readers with exclusive access to a companion website filled with supplementary materials, allowing you to continue to learn in a hands-on fashion long after closing the book.
Book Synopsis Earnings Quality by : Jennifer Francis
Download or read book Earnings Quality written by Jennifer Francis and published by Now Publishers Inc. This book was released on 2008 with total page 97 pages. Available in PDF, EPUB and Kindle. Book excerpt: This review lays out a research perspective on earnings quality. We provide an overview of alternative definitions and measures of earnings quality and a discussion of research design choices encountered in earnings quality research. Throughout, we focus on a capital markets setting, as opposed, for example, to a contracting or stewardship setting. Our reason for this choice stems from the view that the capital market uses of accounting information are fundamental, in the sense of providing a basis for other uses, such as stewardship. Because resource allocations are ex ante decisions while contracting/stewardship assessments are ex post evaluations of outcomes, evidence on whether, how and to what degree earnings quality influences capital market resource allocation decisions is fundamental to understanding why and how accounting matters to investors and others, including those charged with stewardship responsibilities. Demonstrating a link between earnings quality and, for example, the costs of equity and debt capital implies a basic economic role in capital allocation decisions for accounting information; this role has only recently been documented in the accounting literature. We focus on how the precision of financial information in capturing one or more underlying valuation-relevant constructs affects the assessment and use of that information by capital market participants. We emphasize that the choice of constructs to be measured is typically contextual. Our main focus is on the precision of earnings, which we view as a summary indicator of the overall quality of financial reporting. Our intent in discussing research that evaluates the capital market effects of earnings quality is both to stimulate further research in this area and to encourage research on related topics, including, for example, the role of earnings quality in contracting and stewardship.
Book Synopsis Cost of Capital by : Shannon P. Pratt
Download or read book Cost of Capital written by Shannon P. Pratt and published by John Wiley & Sons. This book was released on 2010-10-26 with total page 276 pages. Available in PDF, EPUB and Kindle. Book excerpt: Praise for Fourth Edition of Cost of Capital Workbook and Technical Supplement "Pratt and Grabowski went the extra mile to supplement their magnum opus by providing this Workbook and Technical Supplement. As a finance professor for many years, I know from experience that students and teachers really value supplements to textbooks. It allows the teacher to help the student to review and apply what was presented in the text, and the PowerPoints are a great service to teachers in course preparation. The website provides various worksheets that show the inner workings of the models. I enthusiastically recommend the Workbook and Technical Supplement to finance professors and teachers and their students. —Daniel L. McConaughy, PhD, ASA, Professor of Finance, California State University, Northridge, Valuation Services, Crowe Horwath LLP "The Workbook and Technical Supplement provides a detailed tutorial on understanding and executing the theoretical concepts explained in the Fourth Edition. This supplement is three books in one. Part One is a step-by-step tutorial on estimating certain key components of the cost of equity capital. Part Two provides a bridge between the theory and some practical applications, such as estimating the cost of capital for real property. Parts Three and Four allow the readers to test their comprehension of the concepts and identify areas for a review. It is almost as good as having Professors Pratt and Grabowski looking over your shoulder to ensure that one is both comprehending and correctly implementing the complex concepts.." —Ashok Abbott, PhD, Associate Professor of Finance, College of Business & Economics, West Virginia University "This text provides the most comprehensive coverage of cost of capital issues that I have seen to date. Messrs. Pratt and Grabowski have created a very accessible and lucid treatment of what most would consider an opaque subject. The Fourth Edition is especially important for its new topics as well as expanded coverage of concepts from earlier editions. Of particular interest is the review of the extreme market conditions during the 2008–2009 crisis and the effect that the unprecedented volatility had on traditional cost of capital models. For years, Pratt and Grabowski's research has informed the business valuation curriculum of the American Society of Appraisers. This book will be added to our reading list, and thousands of students worldwide will benefit from the state?of?the?art content of the Fourth Edition and the companion Workbook and Technical Supplement. Furthermore, Cost of Capital, Fourth Edition should be a mandatory part of every valuation practitioner's library. If you buy this book, you can expect it to become well worn and remain on your desk within arm's length until the publication of the Fifth Edition." —John Barton, ASA, CPA, Chairman, Business Valuation Committee, ASA "Cost of capital is so much more complex than it used to be. With so many additional considerations regarding each variable of the cost of capital formula, this book is a must for anyone that needs to understand or develop a discount rate. Even the most experienced practitioner will benefit from the outstanding work of Pratt and Grabowski. This book has to become part of your library." —Gary R. Trugman, CPA/ABV, MCBA, ASA, MVS, President, Trugman Valuation Associates, Inc.
Book Synopsis Deleveraging and Decline in Revenue-Expense Matching Over Time by : Jeong-Hoon Hyun
Download or read book Deleveraging and Decline in Revenue-Expense Matching Over Time written by Jeong-Hoon Hyun and published by . This book was released on 2018 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: Accounting rules mandate that the cost of debt should be recorded as an expense, while the cost of equity does not appear in the income statement. Therefore, the amount of financing expense, and thus net income, in the income statements depends on how firms finance their business. Based on a clear, substantial trend of declining leverage since the 1990s, we examine how changes in capital structure might influence earnings attributes-the matching between revenues and expenses. We find that the contemporaneous relation between revenues and interest expense in US firms has decreased from 1972 to 2013, a result of both changes in leverage and the declining explanatory power of interest expense with respect to revenues. When we construct the weighted average costs of capital based on the costs of both debt and equity, we find the contemporaneous relation between revenues and the costs of capital has not significantly changed. Our results indicate that differential accounting treatment of the costs of debt and equity can affect earnings attributes through change in capital structure.
Book Synopsis A Latent Class Model of Earnings Attributes by : Paul K. Chaney
Download or read book A Latent Class Model of Earnings Attributes written by Paul K. Chaney and published by . This book was released on 2012 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: While the term quot;earnings qualityquot; has been overused, rarely defined, and largely misunderstood, there is general agreement that users of financial statements react to their content, and that the accuracy and credibility of that content matters to them. To differentiate among financial reports, many papers rely on the association between one specific earnings attribute (such as accruals variability) and some observable outcome (auditor choice, for example). A notable exception, Francis, LaFond, Olsson and Schipper (2004) examine the relation between the cost of capital and several earnings attributes, including both accounting-based characteristics and market-based attributes. Whether each of these attributes provides incremental information for users of financial data beyond the others has not yet been established. We draw upon Dechow and Dichev (2002), Francis et al. (2004), and Khan and Watts (2007) to identify potentially informative reporting dimensions or earnings attributes. We use a latent class analysis to show empirically that our measures for Accrual Variability, Persistence, Smoothness, Predictability, and Conservatism all have significant incremental value in differentiating among firms. The best across-firm latent class model also allows us to identify and study six categories of firms that differ significantly in terms of these five distinct measures. We summarize how these groups of firms differ in terms of both the attributes themselves and various innate firm characteristics. We also show how this new classification of firms is related to a principal component analysis, and we seek the best within-group model for each attribute in terms of innate firm characteristics. We find that two primary principal components provide useful and complementary summaries of the primary dimensions of the attributes examined.
Book Synopsis Intellectual Capital and Earnings Attributes by : Mohammadghorban Mehri
Download or read book Intellectual Capital and Earnings Attributes written by Mohammadghorban Mehri and published by . This book was released on 2013-09-29 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Cost of Capital by : Shannon P. Pratt
Download or read book Cost of Capital written by Shannon P. Pratt and published by John Wiley & Sons. This book was released on 2008-02-25 with total page 448 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this long-awaited Third Edition of Cost of Capital: Applications and Examples, renowned valuation experts and authors Shannon Pratt and Roger Grabowski address the most controversial issues and problems in estimating the cost of capital. This authoritative book makes a timely and significant contribution to the business valuation body of knowledge and is an essential part of the expert's library.
Book Synopsis Accounting-Based Downside Risk, Cost of Capital, and the Macroeconomy by : Yaniv Konchitchki
Download or read book Accounting-Based Downside Risk, Cost of Capital, and the Macroeconomy written by Yaniv Konchitchki and published by . This book was released on 2015 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: We hypothesize that earnings downside risk, capturing the expectation for future downward operating performance, contains distinct information about firm risk and varies with cost of capital in the cross section of firms. Consistent with the validity of the earnings downside risk measure, we find that, relative to low earnings downside risk firms, high earnings downside risk firms experience more negative operating performance over the subsequent period, are more sensitive to downward macroeconomic states, and are more strongly linked to earnings attributes and other risk-related measures from prior research. In line with our prediction, we also find that earnings downside risk explains variation in firms' cost of capital, and that this link between earnings downside risk and cost of capital is incremental to several earnings attributes, accounting and risk factor betas, return downside risk, default risk, earnings volatility, and firm fundamentals. Overall, this study contributes to accounting research by demonstrating the key valuation and risk assessment roles of earnings downside risk derived from firms' financial statements, also shedding new light on the link between accounting and the macroeconomy.
Book Synopsis Expected Earnings Growth and the Cost of Capital by : Christina Dargenidou
Download or read book Expected Earnings Growth and the Cost of Capital written by Christina Dargenidou and published by . This book was released on 2006 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Book Synopsis The world price of earnings opacity by : Uptal Bhattacharya
Download or read book The world price of earnings opacity written by Uptal Bhattacharya and published by . This book was released on 2002 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis The Cost of Capital by : Wilbur G. Lewellen
Download or read book The Cost of Capital written by Wilbur G. Lewellen and published by . This book was released on 1969 with total page 148 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Cost of Capital by : Shannon P. Pratt
Download or read book Cost of Capital written by Shannon P. Pratt and published by . This book was released on 1998-05-25 with total page 268 pages. Available in PDF, EPUB and Kindle. Book excerpt: Cost of capital estimation has long been recognized as the most critical element in business valuation, capital budgeting, feasibility studies, and corporate finance decisions. Renowned author and valuation expert Shannon Pratt addresses the most controversial issues and thorny problems in estimating the cost of capital and offers sensible solutions.
Book Synopsis Capital Market Implications of Earnings Quality by : Bianca Ahrens
Download or read book Capital Market Implications of Earnings Quality written by Bianca Ahrens and published by BoD – Books on Demand. This book was released on 2010 with total page 282 pages. Available in PDF, EPUB and Kindle. Book excerpt: In his speech from 1998 the former chairman of the United States Securities and Exchange Commission (SEC) Arthur Levitt pointed out that trust "is the bedrock of our capital markets" and that this must not be shaken by the erosion of earnings quality. He made clear that it is the challenge of the whole financial community to counteract such a development. This thesis deals with the question whether the importance of earnings for the capital market varies with its quality. The question arises, because in recent years a large number of firm scandals has shaken the trust in the reliability of reported earnings. In order to properly address the research questions, the literature on earnings quality definitions, quality measures as well as implications of earnings quality on capital markets is reviewed and critically discussed. The author investigates whether well known results concerning capital market implications of earnings quality remain stable for all measures considered. She answers the question of how earnings quality affects firm value, cost of equity capital, and the accuracy of analysts' forecasts taking into account the effects of determinants of earnings quality.
Book Synopsis Earnings Surprises and the Cost of Equity Capital by : Michael B. Mikhail
Download or read book Earnings Surprises and the Cost of Equity Capital written by Michael B. Mikhail and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Controlling for other determinants of the cost of capital, we find that firms with repeated large earnings surprises experience a higher cost of equity capital. This finding holds regardless of the sign of the earnings surprises, but firms that consistently report negative surprises have relatively higher cost of equity capital. Although firms that frequently surprise the market experience a decrease in analyst following relative to no surprise firms, this reduction in monitoring cannot account for the higher cost of equity capital. Overall, these findings document that repeated earnings surprises are costly, and provide evidence that managers have incentives to avoid missing earnings targets.
Book Synopsis Earnings, Idiosyncratic Volatility and Costs of Capital by : Sana Mohsni
Download or read book Earnings, Idiosyncratic Volatility and Costs of Capital written by Sana Mohsni and published by . This book was released on 2008 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis consists of three essays. The first essay (chapter two) examines short- and long-term persistence and predictability of earnings and cash-flow growth rates. Aggregate results show that the mean firm exhibits persistence in short-term earnings growth rates, but little persistence in growth at the long-run. More consistent with economic intuition, aggregate cash-earnings growth rates show some short-term mean-reversion and little persistence in the long-run. Consistent with the earnings smoothing theory, cross-sectional results show short-term persistence in earnings growth rates. Cash-earnings, which suffer less manipulation than accrual earnings, show short-term cross-sectional mean-reversion. Long-term growth rates show evidence of mean-reversion in both cases. Our most interesting findings are related to various examined attributes such as age, industry characteristics, listing exchange, and the number of analysts following the stock which are shown to have an impact on the growth persistence of individual firms. The second essay (chapter three) examines the increasing trend in idiosyncratic volatility of stock returns, which has been documented by Campbell et al. (2001). Using the Campbell (1991) return decomposition framework, we relate idiosyncratic volatility of returns to the volatility of changes in expected ROEs for one-, two- and three-year horizon forecasts (i.e., to the volatility of cash-flow news). The upward trend in idiosyncratic volatility documented by Campbell et al. (2001) is associated with a similar increasing trend in the volatilities of cash-flow news for the three forecast horizons. This relationship is persistent after correcting for analysts' forecast biases and is consistent for newly-listed and mature firms and for earnings (non- ) announcement periods. Our findings support an informational explanation to the increasing trend in idiosyncratic volatility, and are consistent with the market efficiency hypothesis which implies that stock return volatility is caused by an increase in the uncertainty of fundamental variables. In the third essay (chapter four) we estimate the internal rates of return (IRR) for domestic and cross-listed Canadian firms, nine GICS sectors, and cap-based portfolios. Using the Fama and French (1999) methodology, we distinguish between the IRR on value or the cost of capital as expected by stakeholders and the IRR on cost that represents the implied real cost of investments. The real cost of capital [equity] over the period 1960-2003 is 5.90 [6.58] percent for the entire nonfinancial sector. The real return on such cost is 6.64 [7.78] percent indicating that, similar to the U.S., the Canadian corporate sector creates value. As expected, cross-listed firms enjoy, on average, lower costs of capital and equity than domestic firms. Although the cost of capital varies considerably across GICS sectors, value is created almost equally by all GICS sectors. IRR values on cap-based portfolios are consistent with the negative relationship between costs of capital and firm size. While both types of IRRs decrease on average after we correct for replacement costs and include extraordinary items, the IRR on cost remains higher than the IRR on value confirming the positive value creation hypothesis. Allowing for inflation illusion, our findings suggest that equity was undervalued during most of the sample period and that the misvaluation was lower for cross-listed firms.
