Effects of Management Earnings Forecast on Capital Cost and Stock Return

ABSTRACT: Forecasting earnings per share is an essential factor in investment and is considered important in share adoption methods. It is important both for providers and users. Managers try to estimate future earnings per share in order to gain the confidence of users, who, in return, consider it as a measure of evaluating performance. The present empirical study undertakes to evaluate effects of management earnings forecast on capital cost and stock return in companies listed at Tehran Stock Exchange. This is done using two variables of earnings forecast frequency and earnings forecast errors. Population of the study constitutes 81 active companies in Tehran Stock Exchange. Financial statements of these companies in a period of six years from 2006 to 2011 have been studied. The study proposes four hypotheses and uses mean comparison test of the two populations and multivariate linear regression test with company-year method, in order to test them. Results of the study indicate a significant and converse relationship between earnings forecast frequency and cost of capital, and also a direct and significant relationship between earnings forecast errors and capital cost in companies under observation.