Management Earnings Forecasts and Cost of Equity Capital: Korean Evidence

This study investigates the association between management earnings forecasts and firms’ cost of equity capital in Korea. In Korea, managers are less likely to face heavy litigation costs but their disclosing activities are effectively supervised by the regulatory institution (e.g., the Regulation Fair Disclosure). That is, the legal environment of Korean capital market is fairly unique with low litigation risk and well-established disclosure regulation. In this particular Korean setting, we find that management earnings forecasts help to reduce firms’ cost of equity capital in Korea. Furthermore, we find that greater analysts’ following strengthen the negative association between management earnings forecasts and cost of equity capital. Our empirical results are consistent with the prediction that management earnings forecasts in Korea play a meaningful role in mitigating information asymmetry among capital market participants and so information risks. Our additional empirical results about the influence of analysts’ following on the association between management earnings forecasts and cost of equity capital suggest that analysts conduct a complementary role for management earnings forecasts in reducing firms’ cost of equity capital. This study will contribute to academics and disclosure- related practitioners by documenting how much firms take advantage of reducing cost of equity capital by issuing management earnings forecasts in the circumstance of low litigation costs with well-established disclosure regulation.