Corporate innovation and analysts’ estimates of the cost of equity: Evidence from China

Abstract

We examine the effect of corporate innovation input and output on analysts' estimates of the cost of equity based on data from public listed Chinese companies between 2007 and 2017. Analysts' estimates of the cost of equity significantly increase with corporate innovation input, whereas their estimates decrease with corporate innovation output, as indicated by this research. The results of additional analysis suggest that the role of corporate innovation input in increasing the estimates of the cost of equity is more significant with an increase in environmental uncertainty and negatively mitigated by strong survival ability. However, the role of corporate innovation output in decreasing analysts' estimates of the cost of equity is not significantly moderated by environmental uncertainty or corporate survival ability. Furthermore, we find that analysts consider financial constraints and information asymmetry when estimating the cost of equity. On this basis, the present study confirms that investors are significantly responsive to analysts’ estimates of the cost of equity during investment decision making.