Estimating the Expected Cost of Equity Capital Using Consensus Forecasts

In this study, we develop a technique for estimating a firm’s expected cost of equity capital derivedfrom analyst consensus forecasts and stock prices. Building on the work of Gebhardt/Lee/-Swaminathan (2001) and Easton/Taylor/Shroff/Sougiannis (2002), our approach allows dailyestimation, using only publicly available information at that date. We then estimate the expectedcost of equity capital at the market, industry and individual firm level using historical German datafrom 1989-2002 and examine firm characteristics which are systematically related to theseestimates. Finally, we demonstrate the applicability of the concept in a contemporary case study forDaimlerChrysler and the European automobile industry.