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Chairs Research Seminar Series: Peter Easton : Notre Dame : January 24, 2014
1:30 PM to 3:00 PM
Peter Easton is the Notre Dame Alumni Professor of Accountancy and Director of the Center for Accounting Research and Education at University of Notre Dame. He is an expert in financial statement analysis and valuation. He has published numerous research papers in leading accounting journals and co-authored four books. He has served as an Associate Editor for leading academic accounting journals, and is currently an Editor of the Review of Accounting Studies.
Title: The Expected Rate of Return on Equity Capital Implied by Analysts’ Forecasts of Earnings and Target Prices
Abstract: We ex ante identify forecasts of earnings where analysts are most optimistically biased; these are the forecasts that, when matched to current market prices, imply a relatively high expected rate of return on equity capital. We show that, for these stocks, the forecasts of target prices are also optimistically biased and the magnitude of this bias is comparable to the magnitude of the bias in the earnings forecasts. It follows that, for these stocks, the expected rate of return implied by forecasts of target prices and forecasts of earnings may be a more useful estimate of the cost of equity capital. Thus, we estimate the expected rate of return that equates the present value of expected dividends and target prices with the present value of the pay-offs from earnings-based valuation models. These estimates are less affected by measurement error than estimates based on market prices (as in the extant literature). They also provide better estimates of future returns.
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