Alternative to cost of capital forecasts wins E. Yetton Prize

Monday, 3 December 2012  Features

A paper published in the Australian Journal of Manag​​ement (AJM) that highlights the importance of cost of capital and proposes an answer to the significant error and bias in current estimations, has won the E. Yetton Prize - which celebrates papers published in the AJM that demonstrate exceptional research and impact to the field of management research.

The paper, "Properties of implied cost of capital using analysts' forecasts" was co-authored by Wayne Guay, a Professor of Accounting at The Wharton School at the University of Pennsylvania; S.P. Kothari, a Professor of Management at MIT Sloan School of Management, and Susan Shu, an Associate Professor at the Carroll School of Management.

"Academics and practitioners find it challenging to obtain accurate forecasts of future company earnings using the existing popular 'implied' approach. The alternative solution, which can more accurately determine how much extra return is expected for an incremental increase of risk on an investment, was the basis of the winning paper," the authors explained.

"We propose two easy-to-implement methods to mitigate the influence of sluggish analyst forecasts.

"Our study significantly advances the techniques used by researchers and practitioners to estimate the cost of capital, and has been widely cited in the related literature," they affirmed.

Professor Phillip Yetton introduced the annual prize in 1994, upon his retirement as Editor of the AJM.

The Australian Journal of Management is an internationally peer-reviewed publication of the Australian School of Business. The journal is one of the best in the world and publishes research across a range of disciplines, including economics, political science, psychology and statistics.

Wayne, G., SP Kothari and S. Shu, 2011, "Properties of implied cost of capital using analysts' forecasts", Australian Journal of Management, Volume 36(2), pp.125-149.