Earnings Surprises and the Cost of Equity Capital
Posted: 20 Feb 2004 Last revised: 10 Aug 2014
Date Written: 2004
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: Suggested Citation