Analysts Forecast Behavior And The Cost Of Equity Capital

The cost of equity capital is an important indicator of determine the financing strategies and select the financing channels and evaluation of investment projects. So it has a critical influence on the firm's business and investment decisions and firm's valuation. In order to explore the ways to effectively reduce the cost of equity capital, there are so many researches which focus on its impact factor. One of the main directions is discussion the relationship between information asymmetry and cost of equity capital.After a series of studies, the results indicate that the enterprise information asymmetry has a significant impact on the cost of equity capital. The presence of asymmetric information increases the risk of return demanded by investors, thereby increasing the company's cost of equity capital. Therefore, enterprises should increase information disclosure, and improve information transparency and reduce information asymmetry, so as to achieve the purpose of reducing the cost of equity capital.In the process of reducing information asymmetry, financial analysts have played an important intermediary role of market information. With their advantages of access to information and professional information analysis techniques, financial analysts release earnings forecasts and investment ratings and other information to the market. Their works increase the public information content on the market and improve the information transparency. Moreover, the researches about Western mature capital markets show that the characteristics of analysts forecast behavior can also release new information to the market, and this information may affect investors' investment risk estimates, thereby affecting the companys cost of equity capital.China's capital market is different from Western mature capital market. It has a short history of mandatory information disclosure of listed companies. And there are some non-standard phenomena in firm's information disclosure, such as not timely disclosure, incomplete content, low degree of authenticity, et al.. It makes the process of Chinese investors discovering investment opportunities and making investment decisions according to the information they collected about the aim company become more complicated and difficult. So the investors in China's capital market need information intermediary services provided by financial analysts much more. At the same time, with the rapid development of China's capital market, China's financial analysts have become an important force to develop investment opportunities and guide the capital flows. Along with its increasingly prominent position in the market, it's necessary to investigate the impact of analysts forecast on the market from multiple perspectives.Based on the analysis framework of information asymmetry and the cost of equity capital, and from the intermediary role of market information of analysts, this paper deeply dissects the characteristics of analysts forecast behavior from analyst forecast dispersion, and forecast optimism and forecast revision, so as to locate the information content embodied in analysts forecast behavior itself. And theoretical prove the impact of analysts forecast on the cost of equity capital. And then, based on China's special institutional background, using A-share listed companies from 2005 to 2012 in Shanghai and Shenzhen Stock Exchange market as sample, this paper empirically test the impact of analysts forecast on the cost of equity capital though univariate analysis and multivariate regression analysis. Finally, the study concluded that:The characteristics of analysts forecast, such as forecast dispersion, forecast optimism and forecast revision all have significant and direct impact on the cost of equity capital. Specifically, (1) analysts forecast dispersion reflects the companies'information uncertainty to some extent. The high uncertainty increases investors'investment risk estimates, so as to increase the cost of equity capital. So the analysts forecast dispersion positively correlates with the cost of equity capital. (2) the analysts in China's capital market have optimal bias. Their earning forecasts always have a positive forecast error and they like giving a "buy" rating when they are rating a stock. And the analysts optimism will significantly increase the company's cost of equity capital. (3) China's analyst forecast revisions have information content, and the upward revision always can release more information to the market than the downward revision. So the upward revision can significantly reduce the cost of equity. (4) the timely and frequent revision also have a significant impact on the cost of equity capital, more timely and more frequent forecast revision, the more beneficial to increase the transparency of corporate information, thereby reducing the cost of equity capital.This paper taking the financial analyst of China's capital market as an object, empirically test the impact of analysts forecast behavior on the cost of equity capital from multiple perspectives. It not only provides new evidence that analysts forecast behavior itself has information content, which is helpful to understand the behavior of the analyst, but it also expand the research about cost of equity capital's impact factors to the characteristics of information intermediaries, which will enrich the related research. The conclusions of this study have important practical significance to the participator in the capital market, such as the investor, the company and the market regulators.