Research Details

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.

Type

Article

Author(s)

Michael Mikhail, Beverly Walther, Richard Willis

Date Published

2004

Citations

Mikhail, Michael, Beverly Walther, and Richard Willis. 2004. Earnings Surprises and the Cost of Equity Capital. Journal of Accounting, Auditing and Finance.(4)