Earnings Surprises and the Cost of Equity Capital

Posted: 20 Feb 2004 Last revised: 10 Aug 2014

Date Written: 2004

Abstract

Controlling for other determinants of the cost of capital, we find that firms with repeated large earnings surprises experience a higher cost of equity capital. This finding holds regardless of the sign of the earnings surprises, but firms that consistently report negative surprises have relatively higher cost of equity capital. Although firms that frequently surprise the market experience a decrease in analyst following relative to no surprise firms, this reduction in monitoring cannot account for the higher cost of equity capital. Overall, these findings document that repeated earnings surprises are costly, and provide evidence that managers have incentives to avoid missing earnings targets.

Keywords: Cost of Capital, Earnings Surprises, Analyst Following, Institutional Ownership

JEL Classification: G12, G29, M41

Suggested Citation

Mikhail, Michael B. and Walther, Beverly R. and Willis, Richard H., Earnings Surprises and the Cost of Equity Capital (2004). Journal of Accounting, Auditing, and Finance, Vol. 19, pp. 491-513, 2004, Available at SSRN: https://ssrn.com/abstract=504662 or http://dx.doi.org/10.2139/ssrn.504662

Michael B. Mikhail (Contact Author)

University of Illinois at Chicago - College of Business Administration ( email )

601 South Morgan Street
11th Floor
Chicago, IL 60607
United States

Beverly R. Walther

Northwestern University - Department of Accounting Information & Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-467-1595 (Phone)
847-467-1202 (Fax)

Richard H. Willis

Vanderbilt University - Accounting ( email )

Nashville, TN 37203
United States
615-343-1050 (Phone)
615-343-7177 (Fax)

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