Analysts’ Optimism in Earnings Forecasts and Biases in Estimates of Implied Cost of Equity Capital and Long-Run Growth Rate

2011 ◽  
Author(s):  
David J. Ashton ◽  
Alan Gregory ◽  
Pengguo Wang
Keyword(s):  
Growth Rate ◽  
Earnings Forecasts ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Long Run ◽  
Implied Cost Of Equity

The Effects of Covenant Violations on the Underpricing of Seasoned Equity Offerings and the Implied Cost of Equity Capital

2016 ◽  
Vol 06 (01) ◽  
pp. 1640003 ◽  
Author(s):  
Anh Ngo ◽  
Hong Duong ◽  
Anthony Chen
Keyword(s):  
Earnings Forecasts ◽  
Seasoned Equity Offerings ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Equity Offerings ◽  
Negative Effects ◽  
The Impact ◽  
Covenant Violations ◽  
Implied Cost Of Equity

This study examines the impact of covenant violations on the implied cost of equity capital and the underpricing of seasoned equity offerings (SEOs). Using a novel dataset of 1,028 first-time covenant violations from 1996–2011, we find a higher level of SEO underpricing during the period immediately following covenant violations. This suggests that creditors require violating firms to issue equity to lower leverage and that equity investors interpret the violation negatively. We also find that violating firms experience an average increase of 8.48% in the implied cost of equity capital. By comparing analysts’ earnings forecasts before and after the violations, we conclude that the negative effects on equity owe to the loss of flexibility that accompanies covenant violations, and are not simply a reflection of the deteriorating health of the firm.

Owner-Managers and the Implied Cost of Equity Capital: Evidence from Chaebol Firms

2021 ◽  
Vol 50 (5) ◽  
pp. 1255-1277
Author(s):  
Soo Yeon Park ◽  
Hongmin Chun
Keyword(s):  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Implied Cost Of Equity

scholarly journals The Effect of Corporate Tax Avoidance on the Cost of Equity

2016 ◽  
Vol 91 (6) ◽  
pp. 1647-1670 ◽  
Author(s):  
Beng Wee Goh ◽  
Jimmy Lee ◽  
Chee Yeow Lim ◽  
Terry Shevlin
Keyword(s):  
Information Quality ◽  
Tax Avoidance ◽  
Cash Flows ◽  
Equity Capital ◽  
Testable Hypothesis ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Corporate Tax ◽  
Long Run ◽  
The Cost

ABSTRACT Based on Lambert, Leuz, and Verrecchia's (2007) derivation of the cost of equity capital in terms of expected cash flows, we generate a testable hypothesis that relates tax avoidance to a firm's cost of equity capital. Using three broad measures of tax avoidance—book-tax differences, permanent book-tax differences, and long-run cash effective tax rates—to test our hypothesis, we find that the cost of equity is lower for tax-avoiding firms. This effect is stronger for firms with better outside monitoring, firms that likely realize higher marginal benefits from tax savings, and firms with higher information quality. Overall, our results suggest that equity investors generally require a lower expected rate of return due to the positive cash flow effects of corporate tax avoidance. JEL Classifications: G32; H26; M41.

Earnings Smoothness, Average Returns, and Implied Cost of Equity Capital

2010 ◽  
Vol 85 (1) ◽  
pp. 315-341 ◽  
Author(s):  
John McInnis
Keyword(s):  
Stock Returns ◽  
Lower Cost ◽  
Cost Of Capital ◽  
Empirical Work ◽  
Earnings Forecasts ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Implied Cost Of Capital ◽  
Earnings Smoothness

ABSTRACT: 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. Although 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.

scholarly journals Equity-Based Compensation For Outside Directors And Cost Of Equity Capital

2013 ◽  
Vol 30 (1) ◽  
pp. 15 ◽  
Author(s):  
Induck Hwang ◽  
Hyungtae Kim ◽  
Sangshin Pae
Keyword(s):  
Lower Cost ◽  
Negative Relationship ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Outside Directors ◽  
Total Compensation ◽  
The Cost ◽  
Implied Cost Of Equity

<p>This study provides evidence on the association between equity-based compensation for outside directors and the implied cost of equity capital. Based on the premise that equity-based compensation for outside directors better aligns the interests of the directors with those of shareholders, we investigate whether the more equity-based compensation is granted to outside directors, the lower cost of equity capital firms enjoy. We find a negative relationship between the proportion of equity-based compensation to total compensation for outside directors and the cost of equity capital. Our findings suggest that equity-based compensation for outside directors, by motivating the directors to play their monitoring role more faithfully, reduces agency risks resulting in the lower cost of equity capital.</p>

Managerial Centrality and Implied Cost of Equity Capital: Evidence from Korea

2018 ◽  
Vol 36 (2) ◽  
pp. 109-133 ◽  
Author(s):  
Bo-Young Moon ◽  
Hong-Min Chun
Keyword(s):  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Implied Cost Of Equity
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