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Earnings Surprises And The Cost Of Equity Capital
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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 Asymmetric Effects of Informed Trading on the Cost of Equity Capital by : Michael J. Brennan
Download or read book Asymmetric Effects of Informed Trading on the Cost of Equity Capital written by Michael J. Brennan and published by . This book was released on 2015 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt: We decompose the structural estimate of the probability of informed trading, PIN, into components that capture informed trading on good and on bad news. We estimate these two components at quarterly intervals, and provide new evidence that they capture informed trading around earnings announcements. Specifically, a high likelihood of trading on favorable (adverse) private information predicts positive (negative) earnings surprises. Motivated by arguments that investors may be more concerned about informed selling, which depresses the sale price of net long security holders, than about informed buying, which raises the sale price, we then investigate asymmetry in the pricing of private information as captured by the two different components of PIN. We find strong evidence of such asymmetry: the estimated effect of adverse private information on the equity cost of capital is large and highly significant, while the estimated effect of favorable private information is small and statistically insignificant.
Book Synopsis Earnings Smoothness, Average Returns, and Implied Cost of Equity Capital by : John M. McInnis
Download or read book Earnings Smoothness, Average Returns, and Implied Cost of Equity Capital written by John M. McInnis and published by . This book was released on 2010 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: Despite a belief among corporate executives that smooth earnings paths lead to a lower cost of equity capital, I find no relation between earnings smoothness and average stock returns over the last 30 years. In other words, owners of firms with volatile earnings are not compensated with higher returns, as one would expect if volatile earnings lead to greater risk exposure. Though prior empirical work links smoother earnings to a lower implied cost of capital, I offer evidence that this link is driven primarily by optimism in analysts' long-term earnings forecasts. This optimism yields target prices and implied cost of capital estimates that are systematically too high for firms with volatile earnings. Overall, the evidence is inconsistent with the notion that attempts to smooth earnings can lead to a lower cost of equity capital.
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 Earnings Expectations, Security Valuation, and the Cost of Equity Capital by : Richard A. Crowell
Download or read book Earnings Expectations, Security Valuation, and the Cost of Equity Capital written by Richard A. Crowell and published by . This book was released on 1967 with total page 520 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Earnings, Earnings Growth and Value by : James A. Ohlson
Download or read book Earnings, Earnings Growth and Value written by James A. Ohlson and published by Now Publishers Inc. This book was released on 2006 with total page 90 pages. Available in PDF, EPUB and Kindle. Book excerpt: Earnings, Earnings Growth and Value presents a model of earnings and dividends leading up to the core principle that growth in earnings explains the price to forward-earnings ratio. This model is referred to as the OJ (Ohlson and Jeuttner-Nauroth) model. The OJ model takes into account two growth measures of earnings -- the near term and the long term -- to explain the price to forward-earnings ratio. Further, the model allows for a broad set of dividend policies. Earnings, Earnings Growth and Value starts from the basics and derives the valuation formula which shows how value depends on earnings and their growth. Some of the topics developed here are include dividend policy irrelevancy (DPI), how one extends the model to incorporate an underlying information dynamic, accounting rules and their influence on the model, and ways in which the model can be extended to reflect operating vs. financial activities. Earnings, Earnings Growth and Value should be required reading for researchers in accounting and finance with an interest in accounting theory, equity valuation and financial accounting.
Book Synopsis Equity Valuation and Negative Earnings by : Ana Paula Matias Gama
Download or read book Equity Valuation and Negative Earnings written by Ana Paula Matias Gama and published by Springer. This book was released on 2016-12-20 with total page 173 pages. Available in PDF, EPUB and Kindle. Book excerpt: Building upon Feltham and Ohlson models, this book examines positive loss-earnings within the context of the dot.com bubble during the boom years of the late 1990s bull market. The strong demand for equity financing captured the imagination of investors from Europe and U.S. like never before. With a focus on U.S. Internet companies, the book explores both the birth and the death of the new economy, and how negative earnings and losses still garnered large investments and successful IPOs (Initial Public Offerings). As Internet based ventures and the digital economy keep attracting large amounts of equity financing, this book explains that there is something unique in the valuation and pricing of tech companies. The book was written for corporate financiers, capital market professionals, and academics to further their understanding of equity valuation and the effects of equity trading.
Book Synopsis Are Smoother Earnings Associated with a Lower Cost of Equity Capital? by : John Michael McInnis
Download or read book Are Smoother Earnings Associated with a Lower Cost of Equity Capital? written by John Michael McInnis and published by . This book was released on 2008 with total page 130 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Implied Cost of Equity Capital in Earnings-Based Valuation by : Feng Chen
Download or read book Implied Cost of Equity Capital in Earnings-Based Valuation written by Feng Chen and published by . This book was released on 2009 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: Assuming the clean surplus relation, the Edwards-Bell-Ohlson residual income valuation (RIV) model expresses market value of equity as the sum of the book value of equity and the expected discounted future residual incomes. Without assuming the clean surplus relation, Ohlson and Juettner-Nauroth (2000) articulate the role of forward earnings per share in valuation. We compare the implied costs of equity capital from these two approaches to earnings-based valuation within seven developed countries. We hypothesize superior performance from the RIV model in countries where the clean surplus relation holds well. First, we provide preliminary international evidence on the frequency and magnitude of the clean surplus deviations. Consistent with our hypothesis, we document superior reliability of the implied cost of equity capital derived from the RIV model when clean surplus adequately describes the firms' financial reporting. That is, the implied cost of equity capital derived from Ohlson and Juettner-Nauroth (2000) is relatively more reliable in countries where the clean surplus deviations are common. Our analyses suggest that the proper choice of earnings-based valuation model may depend on analysts' interpretation of their financial reporting environment.
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 Effect of Earnings Quality on the Association Between Information Precision and the Cost of Equity Capital by : Jia Zhu
Download or read book The Effect of Earnings Quality on the Association Between Information Precision and the Cost of Equity Capital written by Jia Zhu and published by Open Dissertation Press. This book was released on 2017-01-27 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation, "The Effect of Earnings Quality on the Association Between Information Precision and the Cost of Equity Capital" by Jia, Zhu, 朱佳, was obtained from The University of Hong Kong (Pokfulam, Hong Kong) and is being sold pursuant to Creative Commons: Attribution 3.0 Hong Kong License. The content of this dissertation has not been altered in any way. We have altered the formatting in order to facilitate the ease of printing and reading of the dissertation. All rights not granted by the above license are retained by the author. Abstract: Abstract of thesis entitled The Effect of Earnings Quality on the Association between Information Precision and the Cost of Equity Capital Submitted by Zhu Jia For the Degree of Master of Philosophy At the University of Hong Kong In March 2007 Abstract A growing volume of literature on the association between information and the cost of equity capital has investigated various firm-specific factors that may affect the relationship between public disclosure and the cost of equity capital. My empirical study adds to this literature by showing that the earnings quality of firms might also play a determining role in the association between public information precision and the cost of equity capital. The earnings quality indicator in this study is used to proxy the value-relevance of public disclosure and is included as a control variable in the regression of the cost of equity capital estimates on the information precision. I document that public information is in general negatively associated with the cost of equity capital. However, when the earnings quality of firms is deteriorating to certain extent, the cost of equity capital goes up in response to more precise public information. Moreover, I find that the public and private information precisions act as complements. On the other hand, I do not find an unambiguous association between private information precision and the cost of equity capital, nor any reliable evidence about the direct impact of the earnings quality indicator on the cost of equity capital. (No. of words: 201) DOI: 10.5353/th_b3879143 Subjects: Corporate profits Disclosure of information Capital costs
Book Synopsis The Factors Influencing Earnings Management and Implications for the Cost of Equity Capital by : Endri Endri
Download or read book The Factors Influencing Earnings Management and Implications for the Cost of Equity Capital written by Endri Endri and published by . This book was released on 2020 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study aims to analyse the CGPI, audit committee, and company size on earnings management and their implications for the cost of equity capital. The research method used is panel data regression analysis, with a purposive sampling method obtained a sample of eight companies that consistently followed the Corporate Governance Perception Index (CGPI) program respectively from 2012-2016 and listed on the Indonesia Stock Exchange. The results of the research showed that in the first model partially CGPI, and the audit committee did not affect earnings management. In contrast, the size of the firm had a significant positive effect on earnings management. Furthermore, in the second model, CGPI and earnings management partially had a significant positive effect on the cost of equity capital. The audit committee did not affect the cost of equity capital, and the size of the company had a significant negative effect on the cost of equity capital. Earnings management is still quite high, and the existence of CGPI and audit committees is still less effective to oversee the actions of the earnings management. Therefore, investors need to anticipate the accrual information which is presented in financial statements because of the higher the accrual level, then the higher the cost of equity capital.
Book Synopsis Management Earnings Forecast Policies and the Cost of Equity Capital by : Lisa Austin Hinson
Download or read book Management Earnings Forecast Policies and the Cost of Equity Capital written by Lisa Austin Hinson and published by . This book was released on 2016 with total page 140 pages. Available in PDF, EPUB and Kindle. Book excerpt: I investigate whether managerial motivations for issuing management forecasts impact the relation between forecast policies and the cost of equity capital. Extant research on the relation between voluntary disclosure and the cost of equity capital assumes that management discloses information to credibly adjust investor expectations and, thus, lower cost of capital. My study is motivated by the low likelihood that all management forecasts yield the credible information underlying the beneficial effect on cost of equity capital. Drawing from the literature on management forecast incentives, I classify management forecast motivations other than cost of capital reduction into three categories: (1) compliance with exchange rules, (2) opportunism to benefit managerial self-interests, and (3) opportunism to benefit aligned managerial/existing shareholder interests. I find that, of firms that forecast, those with policies containing higher percentages of forecasts motivated by rule compliance, managerial opportunism, and aligned managerial/existing shareholder opportunism have higher cost of equity capital. Thus, evidence suggests that underlying forecast motivations impact the management earnings forecast policy-cost of equity capital relation.
Book Synopsis The Degrees-of-Freedom Problem and Implied Cost of Equity Capital by : Abdul H. Rahman
Download or read book The Degrees-of-Freedom Problem and Implied Cost of Equity Capital written by Abdul H. Rahman and published by . This book was released on 2007 with total page 20 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recently, Easton and Sommers (2006) provide evidence of a pervasive upward bias of about 3.5 per cent in implied cost of equity estimators arising from persistent optimistic analysts' forecast of earnings. Deng, Kim and Yeo (2006) derive an estimation procedure that infers the bias in earnings forecasts for different horizons and present evidence that investors, on average, adjust one-year earnings forecasts downwards by about 10 percent. In this paper, we assert that another source of bias arises from a degrees-of-freedom problem and we present a general solution to this problem by deriving an equity valuation model that incorporates a forecast horizon of T periods. We also derive an estimate of the implied cost of equity capital as the solution of a polynomial equation of degree T+1. Hence the common practice (e.g., Gode and Mohanram, 2003; Botosan and Plumlee, 2005) of adjusting the forecast horizon beyond two years and yet retain a quadratic equation implied by the Ohlson and Juettner-Nauroth model, may be incorrect. Furthermore, we show that this polynomial equation has a very interesting nested property, where any the polynomial equation of degree n is obtained as a simple algebraic transformation of the polynomial equation of degree n-1.
Book Synopsis Valuation of Common Stock and the Cost of Equity Capital by : John Gregory McDonald
Download or read book Valuation of Common Stock and the Cost of Equity Capital written by John Gregory McDonald and published by . This book was released on 1967 with total page 208 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Real Earnings Management and Cost of Capital by : Jeong-Bon Kim
Download or read book Real Earnings Management and Cost of Capital written by Jeong-Bon Kim and published by . This book was released on 2013 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study investigates whether a firm's cost of equity capital is influenced by the extent of a firm's real activities management. Using a large sample of U.S. firms, we find that our proxy for the cost of capital is positively associated with the extent of earnings management through the real activities manipulation after controlling for the effect of the accrual-based earnings management. We also provide evidence suggesting that this positive association stems from managerial opportunism rather than from the measurement errors in our real earnings management proxies. The main findings are robust to a battery of sensitivity tests. Collectively, our results suggest that real earnings management activities exacerbate the information quality of earnings used by outside investors, and thus the market demands a higher risk premium for these activities, which is incremental to the risk premium for the accrual-based earnings management.
Book Synopsis Implied Cost of Equity Capital Estimates as Predictors of Accounting Returns and Stock Returns by : Stephannie Larocque
Download or read book Implied Cost of Equity Capital Estimates as Predictors of Accounting Returns and Stock Returns written by Stephannie Larocque and published by . This book was released on 2017 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using a popular return decomposition, we show that expected returns should on average be positively associated with future return on equity (ROE), controlling for the book-to-market ratio (BM). However, we find that none of the commonly-used implied cost of equity capital estimates (ICCs), which proxy for expected returns, are positively associated with future ROE. This lack of association with future accounting returns appears to affect the ability of ICCs to forecast future stock returns: ICCs do not provide information about future stock returns incremental to that contained in a linear combination of current ROE and BM. Our findings suggest that tractable accounting-based models that linearly combine BM and ROE, or other accounting-based variables, offer improvements on extant ICCs as expected returns proxies.
