Earnings Surprises and the Cost of Equity Capital

Michael B. Mikhail, Richard H. Willis, Beverly Walther

Research output: Contribution to journalReview article

28 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)491-513
Number of pages23
JournalJournal of Accounting, Auditing & Finance
Volume19
Issue number4
DOIs
StatePublished - Jan 1 2004

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics, Econometrics and Finance (miscellaneous)

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