*Management Forecasts and the Cost of Equity Capital: International Evidence

• In Event: Management Forecasts

Abstract

In this study, we use hand collected database of management forecasts for firms from 31 countries from 2004 through 2009 to examine the effect of management forecasts, which proxy for voluntary disclosure, on the cost of equity capital. We find that, on average, firms from around the world enjoy a lower cost of equity capital when they make management forecasts. We also find that the effect of management forecasts on the cost of equity capital is greater for firms from countries with stronger investor protection and better information dissemination, but is weaker for those from countries with higher mandatory disclosure requirements. Further analysis reveals that our findings are more pronounced when management forecasts are more frequent, more precise, and more disaggregated. Our results are robust to a battery of robustness checks including using an alternative measure of the cost of equity capital. Overall, our findings suggest that the ability of management forecasts to reduce the cost of equity capital across countries derive from factors that constrain managers’ incentives to issue opportunistic forecasts and from factors that enhance the usefulness of their forecasts.

Authors

• Ying Cao, The Chinese University of Hong Kong

• Linda Ann Myers, University of Arkansas

• Albert Tsang, The Chinese University of Hong Kong - University L

• Yong Yang, The Chinese University of Hong Kong