Using forecasts of earnings to simultaneously estimate growth and the rate of return on equity investment

Peter Easton, Gary Taylor, Pervin Shroff, Theodore Sougiannis

Research output: Contribution to journalArticlepeer-review

116 Scopus citations

Abstract

We develop a method for simultaneously estimating the cost of equity capital and the growth in residual earnings that are implied by current stock prices, current book value of equity, and short-term forecasts of accounting earnings. We demonstrate the use of our method by calculating the expected equity risk premium. Our estimate is higher than estimates in extant studies that are based on the same earnings forecast data. The main difference between our study and these papers is that while they provide arguments supporting an assumed rate of growth beyond the forecast horizon, we estimate this rate.

Original languageEnglish (US)
Pages (from-to)657-676
Number of pages20
JournalJournal of Accounting Research
Volume40
Issue number3
DOIs
StatePublished - Jun 2002

Fingerprint Dive into the research topics of 'Using forecasts of earnings to simultaneously estimate growth and the rate of return on equity investment'. Together they form a unique fingerprint.

Cite this