Disclosure, Analyst Forecast Bias, and the Cost of Equity Capital

This dissertation investigates the relation between firm disclosure, analyst forecast bias, and the cost of equity capital (COEC). Since analyst forecast bias is associated with both implied COEC estimates and disclosure, it is important to control for or remove it from COEC estimates when estimating the relation between disclosure and ex ante expected returns. I begin my analysis by predicting and removing systematic ex ante bias from analyst forecasts to produce de-biased analyst forecasts that better proxy for the market’s ex ante earnings expectations. I use these de-biased analyst forecasts to produce estimates of ex ante expected returns, both at the portfolio- and the firm-level. In addition, I develop a novel estimate of ex ante expected returns by applying Vuolteenaho’s (2002) return decomposition framework to ex post realized returns and accounting data. Finally, using several techniques to control for analyst forecast bias and self-selection bias, I find theoretically consistent evidence of a negative association between regular disclosure and ex ante expected returns. I predict and show that inferences can change when analyst forecast bias is controlled for.