Katalog Online Perpustakaan

Detail Katalog


Accounting Review


cost of capital; earnings smoothness; asset pricing; analyst forecasts.


John McInnis




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.


Vol 85, Nomor 01, Tahun 2010


not files can be downloaded

[Artikel lain]