Review of Recent Research on Improving Earnings Forecasts and Evaluating Accounting-Based Estimates of the Expected Rate of Return on Equity Capital

40 Pages Posted: 17 May 2015 Last revised: 16 Jun 2015

See all articles by Peter D. Easton

Peter D. Easton

University of Notre Dame - Department of Accountancy

Steven J. Monahan

University of Utah; INSEAD

Multiple version iconThere are 2 versions of this paper

Date Written: March 2015

Abstract

We extend Easton’s (2007) review of the literature on accounting-based estimates of the expected rate of return on equity capital, which we refer to as the ERR. We begin by reiterating the reasons why accounting-based estimates are used. Next, we briefly review the recent literature that focuses on improving forecasts of expected earnings by either: (1) removing predictable errors from analysts’ forecasts of earnings or (2) developing cross-sectional regression-based estimates of earnings using prior-period financial data. In the remainder of our review we discuss a recent debate on methods for evaluating estimates of the ERR. We highlight the key points in the debate so that the reader will find it easier to form an independent view of the relative merits of the proposed methods.

Keywords: forecasting earnings, cost of capital, valuation

Suggested Citation

Easton, Peter D. and Monahan, Steven J., Review of Recent Research on Improving Earnings Forecasts and Evaluating Accounting-Based Estimates of the Expected Rate of Return on Equity Capital (March 2015). Abacus, Forthcoming, INSEAD Working Paper No. 2015/43/ACC, Available at SSRN: https://ssrn.com/abstract=2606693 or http://dx.doi.org/10.2139/ssrn.2606693

Peter D. Easton (Contact Author)

University of Notre Dame - Department of Accountancy ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-6096 (Phone)
574-631-5127 (Fax)

Steven J. Monahan

University of Utah ( email )

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Salt Lake City, UT 84112-9303
United States

INSEAD ( email )

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+33 1 60 72 92 53 (Fax)

HOME PAGE: http://www.insead.edu/facultyresearch/faculty/profiles/smonahan/

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