Peter Easton | University of Notre Dame (original) (raw)
Papers by Peter Easton
The Accounting Review, 2012
ABSTRACTCritics argue that fair value provisions in U.S. accounting rules exacerbated the recent ... more ABSTRACTCritics argue that fair value provisions in U.S. accounting rules exacerbated the recent financial crisis by depleting banks' regulatory capital, which curtailed lending and triggered asset sales, leading to further economic turmoil. Defenders counter-argue that the fair value provisions were insufficient to lead to the pro-cyclical effects alleged by the critics. Our evidence indicates that these provisions did not affect the commercial banking industry in the ways commonly alleged by critics. First, we show that fair value accounting losses had minimal effect on regulatory capital. Then, we examine sales of securities during the crisis, finding mixed evidence that banks sold securities in response to capital-depleting charges. However, the sales that potentially resulted from the charges appear to be economically insignificant, as there was no industry- or firm-level increase in sales of securities during the crisis.JEL Classifications: M41; M42; M44.Data Availability:...
Journal of Applied Corporate Finance, Sep 1, 2017
Journal of Applied Corporate Finance
The methods for calculating free cash flow presented in texts on financial statement analysis and... more The methods for calculating free cash flow presented in texts on financial statement analysis and valuation appear to be very different from those in corporate finance texts, causing some confusion among academics as well as practitioners. Financial statement analysis and valuation texts generally begin by valuing just the enterprise operations—that is, the entity that engages in the firm's primary revenue‐generating activities—and then adding back the value of its cash holdings and other financial assets. The corporate finance approach is typically to value all the assets together, including financial assets that are not used in the production of the goods and services provided by the firm. Using a simple example, the authors show that the valuation of the equity ownership of the firm should be the same for both methods of calculating free cash flow, provided the analyst makes the appropriate adjustments to the method for calculating the cost of capital (WACC) used to discount ...
SSRN Electronic Journal, 2020
We use a simple k-nearest neighbors (k-NN) model to forecast a subject firm's annual earnings by ... more We use a simple k-nearest neighbors (k-NN) model to forecast a subject firm's annual earnings by matching its recent earnings history to earnings histories of comparable firms, and then extrapolating the forecast from the comparable firms' lead earnings. Out-of-sample forecasts generated by our model are more accurate than forecasts generated by the random walk; more complicated k-NN models; the matching approach developed by Blouin, Core, and Guay (2010); and popular regression models. These results are robust. Our model's superiority holds for different error metrics, for firms that are followed by analysts and firms that are not, and for different forecast horizons. Our model also generates a novel ex ante indicator of forecast inaccuracy. This indicator, which equals the interquartile range of the comparable firms' lead earnings, is reliable and useful. It predicts forecast accuracy and it identifies situations when our forecasts are strong (weak) predictors of future stock returns.
The Accounting Review, 2021
ABSTRACTThe SEC requires public companies to disclose material information on Form 8-K within fou... more ABSTRACTThe SEC requires public companies to disclose material information on Form 8-K within four days of a triggering event. We show that on 8-K event and filing dates, there is significant abnormal attention on Bloomberg terminals, which are a source of information for institutional investors, while traditional media attention tends to be higher on filing days. Significant price discovery occurs on the event date and on the days between that day and the filing date. The traditional media coverage on the filing day appears to attract the attention of retail investors and leads to further price changes in the direction of the pre-filing day price change. Institutional investors exploit this price pressure via opportunistic liquidity provision. Overall, our evidence suggests that the Form 8-K filing may have little direct informational benefit, particularly to retail investors.JEL Classifications: D8; G1; G2; M4.
Maandblad Voor Accountancy en Bedrijfseconomie, 2000
SSRN Electronic Journal, 2017
SSRN Electronic Journal, 2018
We examine the effect of ASC 820 (formerly known as SFAS 157) on the valuations reported by U.S. ... more We examine the effect of ASC 820 (formerly known as SFAS 157) on the valuations reported by U.S. private equity funds to their investors. In 2008, the FASB implemented ASC 820 to achieve more consistent measurement and increased transparency in fair value reporting. This new standard clarified the most critical accounting policy for private equity funds, which typically include highly illiquid investments. Exploiting a setting where we can observe all cash flows over a fund's lifetime, we show that the interim reported net asset valuations (NAVs) of liquidated private equity funds more accurately predict future net distributions to investors following ASC 820 adoption, particularly for venture funds. We supplement our findings with a difference-indifference test and numerous robustness checks. Our findings shed light on financial reporting in an opaque industry and suggest that enhanced guidance for the implementation of fair value accounting in ASC 820 improved the information environment in a significant cross-section of the financial markets.
Review of Accounting Studies, 2018
We investigate the role of bank regulatory reports in the information environments of banks. We f... more We investigate the role of bank regulatory reports in the information environments of banks. We find that: (1) Call Reports, but not FR Y-9Cs, elicit economically significant stock price and volume reactions when they are publicly released despite the fact that Call Reports usually follow earnings announcements; (2) the release of the Call Reports is tightly clustered around the 30 th day after quarter-end; and, (3) after bank regulators undertook a "modernization project" to speed the processing and public dissemination of regulatory reports, the banking industry routinely experiences abnormal stock price volatility and trading volume on the 30 th day of the quarter. Our findings are of interest to regulators who require and monitor the reports, banks who prepare the reports, investors who may use the reports, and academics who can base research designs on the timing patterns we uncover.
Abacus, 2016
Easton and Monahan (henceforth, EM) (2005) examine the construct validity of accounting-based pro... more Easton and Monahan (henceforth, EM) (2005) examine the construct validity of accounting-based proxies for the expected rate of return (henceforth, ERR t) by associating them with future realized returns, controlling for the discount rate news component and the cash flow news component in those returns. As the derivation of these ERR t relies on current information only, the association test results allow inferences about their usefulness for investing and capital budgeting purposes. Contrary to expectations, their main results on the full cross section (Table 4) reveal a significantly negative (insignificant) coefficient for four (three) of the seven ERR t they evaluate, raising doubts about their construct validity. As ERR t are internal rates of return from an equilibrium valuation model that equates a discounted expected future cash flow (earnings) stream with current price, their construct validity jointly depends on the model from which they are derived, including its steady state assumptions, and the accuracy of input data (e.g., earnings and growth forecasts). 1 My discussion follows EM (2005) and Botosan et al. (henceforth, BPW) (2011), who both evaluate ERR t as originally developed and implemented. Specifically, both papers aim to draw inferences about the construct validity of ERR t by their hypothesized positive association with realized returns. They share a conceptual starting point in that they rely on a decomposition of realized returns into its components, expected return, cash flow news (henceforth, CN t), and discount rate news (henceforth, RN t), and therefore evaluate FRANK ECKER
SSRN Electronic Journal, 2004
and an anonymous reviewer for helpful comments on an earlier draft. We are particularly indebted ... more and an anonymous reviewer for helpful comments on an earlier draft. We are particularly indebted to University of Notre Dame Research Analyst, Hang Li. Earnings Management? Alternative explanations for observed discontinuities in the frequency distribution of earnings, earnings changes, and analysts' forecast errors ABSTRACT The discontinuities at zero in the frequency distributions of reported net income (deflated by beginning-of-period market capitalization), deflated change in net income, I/B/E/S "actual" earnings, and analysts' forecast errors are the most widely cited evidence of earnings management. We provide evidence consistent with alternative explanations for each of these discontinuities. We show that firms reporting small losses are priced significantly differently from firms that report small profits. An effect of this difference in pricing is that earnings to the left of zero are deflated by significantly different denominators than earnings to the right of zero inducing a discontinuity in the distributions of deflated net income and deflated changes in net income at zero. We also show that sample selection criteria may contribute to the discontinuity in these distributions as well as the discontinuity in I/B/E/S actual earnings. Finally, the presumption in the literature which focuses on the discontinuity at zero in the distribution of analysts' forecasts errors is that earnings are managed to meet or beat analysts' forecasts. We provide an alternative explanation: the discontinuity is caused by the fact that analysts' forecast errors tend to be much greater when the forecasts are optimistic than when they are pessimistic. This tendency leads to more small positive forecasts errors (pessimistic forecasts) than small negative forecast errors (optimistic forecasts).
SSRN Electronic Journal, 2015
In this study, we investigate the timing of bank regulatory report releases and their role in ban... more In this study, we investigate the timing of bank regulatory report releases and their role in banks' information environments. Each quarter commercial banks and bank holding companies file detailed financial reports called Call Reports and FR Y-9Cs with bank regulators. We find that Call Reports, but not FR Y-9Cs, elicit economically significant stock price and volume reactions when they are publicly released, even when the Call Report follows an earnings announcement. Our results also indicate that the release of the Call Reports is tightly clustered around the 30th day after quarter end. A historical record of the public release dates of these regulatory reports is not available; we collected these dates for nine quarters and, using these data, we provide evidence that researchers may use an assumed day 30 release date to obtain results about market reaction that are similar to those obtained using the actual release date of the Call Report. Finally, we show that since bank regulators undertook a "modernization project" to speed the processing and public dissemination of regulatory reports, the banking industry routinely experiences abnormal stock price volatility and trading volume on the 30th day of the quarter. Our findings indicate that investors derive incremental information from regulatory filings, and they highlight a marketmoving information event about banks that occurs in a tight window around the 30th day of the quarter.
SSRN Electronic Journal, 2012
SSRN Electronic Journal, 2010
Dame for helpful comments and discussions. We are grateful to Ken French for providing us the Fam... more Dame for helpful comments and discussions. We are grateful to Ken French for providing us the Fama-French factors and industry classification codes, and Shane Corwin, Joel Hasbrouck, and Paul Schultz for sharing their transaction costs measures.
Journal of Accounting Research, 2013
ABSTRACTWe dissect the portion of stock price change of the fiscal year that is recognized in rep... more ABSTRACTWe dissect the portion of stock price change of the fiscal year that is recognized in reported accounting earnings of the year. We call this portion earnings recognition timeliness (ERT). The emphasis in our dissection is on empirical identification of two fundamental precepts of financial accounting: (1) the matching principle, which is manifested in the recognition of expenses in the same period as the related benefits (i.e., sales revenue) accrue; and (2) recognition of expenses in the current period due to changes in expectations regarding earnings of future periods (we refer to these expenses as the expectations element of expenses). Although the expectations element has implicitly been at the core of much of the recent empirical literature on asymmetry in the earnings/return relation, it has not been explicitly identified. This recent literature is based on the premise that bad news about the future leads to more recognition of expenses in the current period (such as w...
Journal of Accounting Research, 2009
ABSTRACTWe document that: (1) the incidence of bond trade increases during the days surrounding e... more ABSTRACTWe document that: (1) the incidence of bond trade increases during the days surrounding earnings announcements, (2) there is a bond‐price reaction to the announcement of earnings, and (3) there is a positive association between annual bond returns and both annual changes in earnings and annual analysts' forecast errors. All of these effects are larger when earnings convey bad news or when the underlying bond is more risky. Taken together, our results suggest that the nonlinear payoff structure of bond securities affects the role of accounting earnings in the bond market.
Journal of Accounting Research, 2009
ABSTRACTA vast literature following Hayn [1995] and Burgstahler and Dichev [1997] attributed the ... more ABSTRACTA vast literature following Hayn [1995] and Burgstahler and Dichev [1997] attributed the so‐called “discontinuities” in earnings distributions around zero to earnings management. Despite recent evidence that these discontinuities are likely caused by other factors, researchers and teachers continue to point to the shapes of these distributions as evidence of earnings management. We provide three sets of further evidence that these discontinuities are likely caused by factors other than earnings management: (1) we provide, as an example, a detailed analysis of the severe effects of sample selection in a recent study; this study erroneously concludes that the shape of an earnings distribution is evidence of earnings management, (2) we provide a simple explanation for the shape of the earnings distribution that is most often cited as evidence of earnings management; the relation between earnings and prices differs with the magnitude and the sign of earnings, and (3) we provide ...
Journal of Accounting and Economics, 2012
We propose a new approach to estimate the implied cost of capital (ICC). Our approach is distinct... more We propose a new approach to estimate the implied cost of capital (ICC). Our approach is distinct from prior studies in that we do not rely on analysts' earnings forecasts to compute the ICC. Instead, we use a cross-sectional model to forecast the earnings of individual firms. Our approach has two major advantages. First, it allows us to estimate the ICC for a much larger sample of firms over a much longer time period. Second, it is not affected by the various issues that lead to the well-documented biases in analysts' forecasts. Our crosssectional earnings model delivers earnings forecasts that outperform consensus analyst forecasts. We show that, as a result, our approach to estimate the ICC produces a more reliable proxy for expected returns than other approaches. We present evidence on the implications for the equity premium and a variety of asset pricing anomalies.
Journal of Accounting and Economics, 1989
Studies of the information content of accounting earnings typically assume earnings response coef... more Studies of the information content of accounting earnings typically assume earnings response coefficients do not vary across firms. Valuation models relating earnings to security prices, however, predict that earnings response coefficients are positively associated with revision coefficients (coefficients relating current earnings to future earnings) and negatively associated with expected rates of return. A random coefficient regression model provides evidence consistent with these predictions. This evidence has implications for interpreting multiple regression models that relate abnormal returns to unexpected earnings and other information variables.
Contemporary Accounting Research, 2009
The Accounting Review, 2012
ABSTRACTCritics argue that fair value provisions in U.S. accounting rules exacerbated the recent ... more ABSTRACTCritics argue that fair value provisions in U.S. accounting rules exacerbated the recent financial crisis by depleting banks' regulatory capital, which curtailed lending and triggered asset sales, leading to further economic turmoil. Defenders counter-argue that the fair value provisions were insufficient to lead to the pro-cyclical effects alleged by the critics. Our evidence indicates that these provisions did not affect the commercial banking industry in the ways commonly alleged by critics. First, we show that fair value accounting losses had minimal effect on regulatory capital. Then, we examine sales of securities during the crisis, finding mixed evidence that banks sold securities in response to capital-depleting charges. However, the sales that potentially resulted from the charges appear to be economically insignificant, as there was no industry- or firm-level increase in sales of securities during the crisis.JEL Classifications: M41; M42; M44.Data Availability:...
Journal of Applied Corporate Finance, Sep 1, 2017
Journal of Applied Corporate Finance
The methods for calculating free cash flow presented in texts on financial statement analysis and... more The methods for calculating free cash flow presented in texts on financial statement analysis and valuation appear to be very different from those in corporate finance texts, causing some confusion among academics as well as practitioners. Financial statement analysis and valuation texts generally begin by valuing just the enterprise operations—that is, the entity that engages in the firm's primary revenue‐generating activities—and then adding back the value of its cash holdings and other financial assets. The corporate finance approach is typically to value all the assets together, including financial assets that are not used in the production of the goods and services provided by the firm. Using a simple example, the authors show that the valuation of the equity ownership of the firm should be the same for both methods of calculating free cash flow, provided the analyst makes the appropriate adjustments to the method for calculating the cost of capital (WACC) used to discount ...
SSRN Electronic Journal, 2020
We use a simple k-nearest neighbors (k-NN) model to forecast a subject firm's annual earnings by ... more We use a simple k-nearest neighbors (k-NN) model to forecast a subject firm's annual earnings by matching its recent earnings history to earnings histories of comparable firms, and then extrapolating the forecast from the comparable firms' lead earnings. Out-of-sample forecasts generated by our model are more accurate than forecasts generated by the random walk; more complicated k-NN models; the matching approach developed by Blouin, Core, and Guay (2010); and popular regression models. These results are robust. Our model's superiority holds for different error metrics, for firms that are followed by analysts and firms that are not, and for different forecast horizons. Our model also generates a novel ex ante indicator of forecast inaccuracy. This indicator, which equals the interquartile range of the comparable firms' lead earnings, is reliable and useful. It predicts forecast accuracy and it identifies situations when our forecasts are strong (weak) predictors of future stock returns.
The Accounting Review, 2021
ABSTRACTThe SEC requires public companies to disclose material information on Form 8-K within fou... more ABSTRACTThe SEC requires public companies to disclose material information on Form 8-K within four days of a triggering event. We show that on 8-K event and filing dates, there is significant abnormal attention on Bloomberg terminals, which are a source of information for institutional investors, while traditional media attention tends to be higher on filing days. Significant price discovery occurs on the event date and on the days between that day and the filing date. The traditional media coverage on the filing day appears to attract the attention of retail investors and leads to further price changes in the direction of the pre-filing day price change. Institutional investors exploit this price pressure via opportunistic liquidity provision. Overall, our evidence suggests that the Form 8-K filing may have little direct informational benefit, particularly to retail investors.JEL Classifications: D8; G1; G2; M4.
Maandblad Voor Accountancy en Bedrijfseconomie, 2000
SSRN Electronic Journal, 2017
SSRN Electronic Journal, 2018
We examine the effect of ASC 820 (formerly known as SFAS 157) on the valuations reported by U.S. ... more We examine the effect of ASC 820 (formerly known as SFAS 157) on the valuations reported by U.S. private equity funds to their investors. In 2008, the FASB implemented ASC 820 to achieve more consistent measurement and increased transparency in fair value reporting. This new standard clarified the most critical accounting policy for private equity funds, which typically include highly illiquid investments. Exploiting a setting where we can observe all cash flows over a fund's lifetime, we show that the interim reported net asset valuations (NAVs) of liquidated private equity funds more accurately predict future net distributions to investors following ASC 820 adoption, particularly for venture funds. We supplement our findings with a difference-indifference test and numerous robustness checks. Our findings shed light on financial reporting in an opaque industry and suggest that enhanced guidance for the implementation of fair value accounting in ASC 820 improved the information environment in a significant cross-section of the financial markets.
Review of Accounting Studies, 2018
We investigate the role of bank regulatory reports in the information environments of banks. We f... more We investigate the role of bank regulatory reports in the information environments of banks. We find that: (1) Call Reports, but not FR Y-9Cs, elicit economically significant stock price and volume reactions when they are publicly released despite the fact that Call Reports usually follow earnings announcements; (2) the release of the Call Reports is tightly clustered around the 30 th day after quarter-end; and, (3) after bank regulators undertook a "modernization project" to speed the processing and public dissemination of regulatory reports, the banking industry routinely experiences abnormal stock price volatility and trading volume on the 30 th day of the quarter. Our findings are of interest to regulators who require and monitor the reports, banks who prepare the reports, investors who may use the reports, and academics who can base research designs on the timing patterns we uncover.
Abacus, 2016
Easton and Monahan (henceforth, EM) (2005) examine the construct validity of accounting-based pro... more Easton and Monahan (henceforth, EM) (2005) examine the construct validity of accounting-based proxies for the expected rate of return (henceforth, ERR t) by associating them with future realized returns, controlling for the discount rate news component and the cash flow news component in those returns. As the derivation of these ERR t relies on current information only, the association test results allow inferences about their usefulness for investing and capital budgeting purposes. Contrary to expectations, their main results on the full cross section (Table 4) reveal a significantly negative (insignificant) coefficient for four (three) of the seven ERR t they evaluate, raising doubts about their construct validity. As ERR t are internal rates of return from an equilibrium valuation model that equates a discounted expected future cash flow (earnings) stream with current price, their construct validity jointly depends on the model from which they are derived, including its steady state assumptions, and the accuracy of input data (e.g., earnings and growth forecasts). 1 My discussion follows EM (2005) and Botosan et al. (henceforth, BPW) (2011), who both evaluate ERR t as originally developed and implemented. Specifically, both papers aim to draw inferences about the construct validity of ERR t by their hypothesized positive association with realized returns. They share a conceptual starting point in that they rely on a decomposition of realized returns into its components, expected return, cash flow news (henceforth, CN t), and discount rate news (henceforth, RN t), and therefore evaluate FRANK ECKER
SSRN Electronic Journal, 2004
and an anonymous reviewer for helpful comments on an earlier draft. We are particularly indebted ... more and an anonymous reviewer for helpful comments on an earlier draft. We are particularly indebted to University of Notre Dame Research Analyst, Hang Li. Earnings Management? Alternative explanations for observed discontinuities in the frequency distribution of earnings, earnings changes, and analysts' forecast errors ABSTRACT The discontinuities at zero in the frequency distributions of reported net income (deflated by beginning-of-period market capitalization), deflated change in net income, I/B/E/S "actual" earnings, and analysts' forecast errors are the most widely cited evidence of earnings management. We provide evidence consistent with alternative explanations for each of these discontinuities. We show that firms reporting small losses are priced significantly differently from firms that report small profits. An effect of this difference in pricing is that earnings to the left of zero are deflated by significantly different denominators than earnings to the right of zero inducing a discontinuity in the distributions of deflated net income and deflated changes in net income at zero. We also show that sample selection criteria may contribute to the discontinuity in these distributions as well as the discontinuity in I/B/E/S actual earnings. Finally, the presumption in the literature which focuses on the discontinuity at zero in the distribution of analysts' forecasts errors is that earnings are managed to meet or beat analysts' forecasts. We provide an alternative explanation: the discontinuity is caused by the fact that analysts' forecast errors tend to be much greater when the forecasts are optimistic than when they are pessimistic. This tendency leads to more small positive forecasts errors (pessimistic forecasts) than small negative forecast errors (optimistic forecasts).
SSRN Electronic Journal, 2015
In this study, we investigate the timing of bank regulatory report releases and their role in ban... more In this study, we investigate the timing of bank regulatory report releases and their role in banks' information environments. Each quarter commercial banks and bank holding companies file detailed financial reports called Call Reports and FR Y-9Cs with bank regulators. We find that Call Reports, but not FR Y-9Cs, elicit economically significant stock price and volume reactions when they are publicly released, even when the Call Report follows an earnings announcement. Our results also indicate that the release of the Call Reports is tightly clustered around the 30th day after quarter end. A historical record of the public release dates of these regulatory reports is not available; we collected these dates for nine quarters and, using these data, we provide evidence that researchers may use an assumed day 30 release date to obtain results about market reaction that are similar to those obtained using the actual release date of the Call Report. Finally, we show that since bank regulators undertook a "modernization project" to speed the processing and public dissemination of regulatory reports, the banking industry routinely experiences abnormal stock price volatility and trading volume on the 30th day of the quarter. Our findings indicate that investors derive incremental information from regulatory filings, and they highlight a marketmoving information event about banks that occurs in a tight window around the 30th day of the quarter.
SSRN Electronic Journal, 2012
SSRN Electronic Journal, 2010
Dame for helpful comments and discussions. We are grateful to Ken French for providing us the Fam... more Dame for helpful comments and discussions. We are grateful to Ken French for providing us the Fama-French factors and industry classification codes, and Shane Corwin, Joel Hasbrouck, and Paul Schultz for sharing their transaction costs measures.
Journal of Accounting Research, 2013
ABSTRACTWe dissect the portion of stock price change of the fiscal year that is recognized in rep... more ABSTRACTWe dissect the portion of stock price change of the fiscal year that is recognized in reported accounting earnings of the year. We call this portion earnings recognition timeliness (ERT). The emphasis in our dissection is on empirical identification of two fundamental precepts of financial accounting: (1) the matching principle, which is manifested in the recognition of expenses in the same period as the related benefits (i.e., sales revenue) accrue; and (2) recognition of expenses in the current period due to changes in expectations regarding earnings of future periods (we refer to these expenses as the expectations element of expenses). Although the expectations element has implicitly been at the core of much of the recent empirical literature on asymmetry in the earnings/return relation, it has not been explicitly identified. This recent literature is based on the premise that bad news about the future leads to more recognition of expenses in the current period (such as w...
Journal of Accounting Research, 2009
ABSTRACTWe document that: (1) the incidence of bond trade increases during the days surrounding e... more ABSTRACTWe document that: (1) the incidence of bond trade increases during the days surrounding earnings announcements, (2) there is a bond‐price reaction to the announcement of earnings, and (3) there is a positive association between annual bond returns and both annual changes in earnings and annual analysts' forecast errors. All of these effects are larger when earnings convey bad news or when the underlying bond is more risky. Taken together, our results suggest that the nonlinear payoff structure of bond securities affects the role of accounting earnings in the bond market.
Journal of Accounting Research, 2009
ABSTRACTA vast literature following Hayn [1995] and Burgstahler and Dichev [1997] attributed the ... more ABSTRACTA vast literature following Hayn [1995] and Burgstahler and Dichev [1997] attributed the so‐called “discontinuities” in earnings distributions around zero to earnings management. Despite recent evidence that these discontinuities are likely caused by other factors, researchers and teachers continue to point to the shapes of these distributions as evidence of earnings management. We provide three sets of further evidence that these discontinuities are likely caused by factors other than earnings management: (1) we provide, as an example, a detailed analysis of the severe effects of sample selection in a recent study; this study erroneously concludes that the shape of an earnings distribution is evidence of earnings management, (2) we provide a simple explanation for the shape of the earnings distribution that is most often cited as evidence of earnings management; the relation between earnings and prices differs with the magnitude and the sign of earnings, and (3) we provide ...
Journal of Accounting and Economics, 2012
We propose a new approach to estimate the implied cost of capital (ICC). Our approach is distinct... more We propose a new approach to estimate the implied cost of capital (ICC). Our approach is distinct from prior studies in that we do not rely on analysts' earnings forecasts to compute the ICC. Instead, we use a cross-sectional model to forecast the earnings of individual firms. Our approach has two major advantages. First, it allows us to estimate the ICC for a much larger sample of firms over a much longer time period. Second, it is not affected by the various issues that lead to the well-documented biases in analysts' forecasts. Our crosssectional earnings model delivers earnings forecasts that outperform consensus analyst forecasts. We show that, as a result, our approach to estimate the ICC produces a more reliable proxy for expected returns than other approaches. We present evidence on the implications for the equity premium and a variety of asset pricing anomalies.
Journal of Accounting and Economics, 1989
Studies of the information content of accounting earnings typically assume earnings response coef... more Studies of the information content of accounting earnings typically assume earnings response coefficients do not vary across firms. Valuation models relating earnings to security prices, however, predict that earnings response coefficients are positively associated with revision coefficients (coefficients relating current earnings to future earnings) and negatively associated with expected rates of return. A random coefficient regression model provides evidence consistent with these predictions. This evidence has implications for interpreting multiple regression models that relate abnormal returns to unexpected earnings and other information variables.
Contemporary Accounting Research, 2009