Voluntary Disclosure and the Cost of Capital: Evidence from Management Earnings Forecasts
34 Pages Posted: 10 Jan 2006
Date Written: December 2005
Abstract
This paper examines the effect of management earnings forecasts on the cost of capital. We find that forecasters of bad news experience a significant increase in the cost of capital in the month after their disclosure. Conversely, the cost of capital for good news forecasters declines mildly in the same period. We also indicate that bad news forecasts are more informative by comparing the absolute value changes in the cost of capital between bad and good news firms. In addition, we find no significant relation between forecast precision and the cost of capital. Finally, we examine the combined effects of the management earnings forecasts and the earnings announcement on the changes in the cost of capital. Consistent with prior studies, we show that the effect of the subsequent earnings announcement is preempted by the management forecasts for bad news firms, but not for good news firms.
Keywords: Management earnings forecasts, the cost of capital, bad news, good news, and the earnings announcement.
Suggested Citation: Suggested Citation
Do you want regular updates from SSRN on Twitter?
Recommended Papers
-
By Christine Botosan and Marlene Plumlee
-
By Christine Botosan and Marlene Plumlee
-
By Paul M. Healy and Krishna Palepu
-
Information and the Cost of Capital
By Maureen O'hara and David Easley
-
Toward an Implied Cost of Capital
By William R. Gebhardt, Charles M.c. Lee, ...
-
Toward an Ex Ante Cost-of-Capital
By William R. Gebhardt, Charles M.c. Lee, ...
-
The World Price of Insider Trading
By Utpal Bhattacharya and Hazem Daouk
-
The Market Pricing of Earnings Quality
By Jennifer Francis, Ryan Lafond, ...