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.
Academic & Professional Qualification
- B.Tech (DAIICT)
- M.Res (London Business School)
- PhD (London Business School)
Peeyush joined HKU in 2020 as an Assistant Professor of Accounting after receiving his Ph.D. in Accounting from London Business School. His research focuses on how disclosures and information intermediaries influence capital market outcomes.
- Introduction to Financial Accounting (ACCT1101)
- Information intermediaries
- Fundamental analysis
- Karthik Balakrishnan, Xanthi Gkougkousi, Wayne R. Landsman, and Peeyush Taori (Forthcoming), “Dark Market Share around Earnings Announcements and Speed of Resolution of Investor Disagreement”, The Accounting Review.
- Karthik Balakrishnan, Lakshmanan Shivakumar, and Peeyush Taori (2021), “Analysts’ Estimates of the Cost of Equity Capital”, Journal of Accounting and Economics, 71(2-3), 101367.
1 Apr 2021
Journal of Accounting and Economics