Equity Premia as Low as Three Percent? Evidence from Analysts' Earnings Forecasts for Domestic and International Stock Markets

Claus, James J.; Thomas, Jacob K.

doi:10.1111/0022-1082.00384

Cited by 1,324 publications

(988 citation statements)

References 36 publications

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“…We find closer agreement between our estimated growth rate and the forecasts produced by the Congressional Budget Office. We also find justification in the use by prior studies of the risk free rate minus 3 % as a proxy of long term growth in terminal valuations (Claus and Thomas 2001;Gode and Mohanram 2003). Our average growth forecast not only assumes the same average value of this latter rate but also shows similar fluctuations to this rate when viewed on a year-byyear basis.…”

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confidence: 54%

“…2 For example, comparing and contrasting five different approaches to generating estimates of the implied cost of equity capital, Botosan and Plumlee (2005) find that the risk premium varies from a low of 1 % to a high of 6.6 %, while the average realized premium during their sample period is 12.5 %. While Easton et al (2002) and Gode and Mohanram (2003) find the equity risk premium to be between 5 and 6 %, others believe that equity risk premium is between 2 and 4 % (for example, Bogle 1999;Claus and Thomas 2001;Gebhardt et al 2001;Pastor et al 2008). 3 Some researchers even suggest that the premium is close to zero (for example, Mehra and Prescott 1985;Glassman and Hassett 1998;Easton and Sommers 2007).…”

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confidence: 99%

“…In addition, firms are assumed to have a 100 % dividend payout ratio beyond the forecast horizon. 1 Claus and Thomas (2001) assume residual earnings grow at the expected inflation rate after a 5-year forecast horizon and assume that 50 % of earnings are retained each period. Botosan and Plumlee (2002) avoid explicit forecasts of future growth rates by using a Value Line forecast as the year-5 terminal value.…”

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confidence: 99%

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Terminal valuations, growth rates and the implied cost of capital

Ashton

Wang

2012

Rev Account Stud

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We develop a model based on the notion that prices lead earnings, allowing for a simultaneous estimation of the implied growth rate and the cost of equity capital for US industrial sectors. The major difference between our approach and that in prior literature is that ours avoids the necessity to make assumptions about terminal values and consequently about future growth rates. In fact, growth rates are an endogenous variable, which is estimated simultaneously with the implied cost of equity capital. Since we require only 1-year-ahead forecasts of earnings and no assumptions about dividend payouts, our methodology allows us to estimate ex ante aggregate growth and risk premia over a larger sample of firms than has previously been possible. Our estimate of the risk premium being between 3.1 and 3.9 % is at the lower end of recent estimates, reflecting the inclusion of these short-lived companies. Our estimate of the long run growth is from 4.2 to 4.7 %.

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confidence: 54%

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confidence: 99%

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Terminal valuations, growth rates and the implied cost of capital

Ashton

Wang

2012

Rev Account Stud

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“…Third, the RIVG model assumes that the residual income beyond two years ahead increases eternally by the annual rate of the risk-free rate minus 3%, which is the long-term inflation rate (Claus and Thomas 2001).…”

Section: B V/p Measurementioning

confidence: 99%

A Comparison of Investors’ and Analysts’ Biases in Interpreting Book-Tax Difference: Evidence from Korean Stock Market

Chun¹,

Shim²

2017

Glob Bus Financ Rev

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A B S T R A C TThis study examines and compares investors' and analysts' biases in interpreting book-tax difference (hereafter BTD). The empirical results of using 1,544 Korean firm-year observations from 2001 to 2008 are as follows. First, we find that BTD is negatively associated with the value-price (V/P) ratio. This result implies that investors have more optimistic biases than analysts do in interpreting BTD. Second, for high institutional ownership sample, the negative association between BTD and V/P ratio would disappear. This empirical result suggests that sophisticated institutional investors understand the meaning of BTD better than general investors. Third, for lower analyst following sample, there was no significant association between BTD and V/P ratios. This implies that higher analyst following reduces biases in analysts' earnings forecasts. This study adds to the growing body of evidence that is related to the efficiency of analysts' earnings forecasts. It is the first empirical study to show that investors do not fully incorporate the meaning of BTD into their stock pricing compared with analysts' earnings forecasts.

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“…In this paper, we consider the CDI at year t as a flat proxy for the risk-free in t+τ. Second, we use a 3% equity-risk premium consistent with Gonçalves Jr., Rochman, Eid, and Chalela (2011) and Claus and Thomas (2001), which found a market premium of 3% in the Brazilian market and several other international markets, respectively. Third, we estimate the market model beta by considering the Ibovespa index as a proxy for the local market portfolio and by running ordinary least squares (OLS) regressions between the continuous monthly returns of firmspecific stock returns and the market index.…”

Section: Empirical Implementation Of the Valuation Modelsmentioning

confidence: 99%

The Role of Earnings Persistence in Valuation Accuracy and the Time Horizon

Pimentel

Aguiar

2016

Rev. adm. empres.

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Based on the assumption that earnings persistence has implications for both financial analysis and compensation contracts, the aim of this paper is to investigate the role of earnings persistence assuming that (i) more persistent earnings are likely to be a better input to valuation models and (ii) more persistent earnings are likely to serve as a proxy for long-term market and managerial orientation. The analysis is based on Brazilian listed firms from 1995 to 2013, and while we document strong support for the relevance of earnings persistence in financial analysis and valuation, we fail to document a significant relationship between earnings persistence and long-term value orientation. These results are sensitive to different specifications, and additional results suggest that firms' idiosyncratic risk (total risk) is relevant to explain the focus on short-term outcomes (short-termism) across firms. The main contribution of this paper is to offer empirical evidence for the relevance of accounting numbers in both valuation and contractual theories in an emergent market.

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Equity Premia as Low as Three Percent? Evidence from Analysts' Earnings Forecasts for Domestic and International Stock Markets

Cited by 1,324 publications

References 36 publications

Terminal valuations, growth rates and the implied cost of capital

Terminal valuations, growth rates and the implied cost of capital

A Comparison of Investors’ and Analysts’ Biases in Interpreting Book-Tax Difference: Evidence from Korean Stock Market

The Role of Earnings Persistence in Valuation Accuracy and the Time Horizon

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