Analyst versus model‐based earnings forecasts: implied cost of capital applications

We find that a composite implied cost of capital (ICC) estimate – based on the earnings forecasts generated by cross‐sectional models – is highly correlated with future realised returns in both portfolio‐ and regression‐based tests. By contrast, we find very little evidence for an association with f...

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Bibliographic Details
Published in:Accounting and finance (Parkville) 2020-12, Vol.60 (4), p.4061-4092
Main Authors: Paton, Alexander P., Cannavan, Damien, Gray, Stephen, Hoang, Khoa
Format: Article
Language:English
Subjects:
Analyst forecasts
Cost of capital
Earnings estimates
Earnings forecasting
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Summary:We find that a composite implied cost of capital (ICC) estimate – based on the earnings forecasts generated by cross‐sectional models – is highly correlated with future realised returns in both portfolio‐ and regression‐based tests. By contrast, we find very little evidence for an association with future realised returns for an ICC estimate based on analyst earnings forecasts. We also document the time‐varying nature of expected returns and risk premia, and provide up‐to‐date estimates of an implied Australian market risk premium.
ISSN:0810-5391
1467-629X
DOI:10.1111/acfi.12548