Consensus earnings estimates, prominently quoted at major media outlets such as CNBC, Bloomberg, and the Wall Street Journal, play an important role in capital markets by providing investors with a proxy for earnings expectations. The common belief is that they are formed by simply taking an average of all analyst forecasts. However, to what extent is this true? Unsophisticated investors know little about the process, while sophisticated investors typically know only what consensus vendors such as Institutional Brokers’ Estimate System (I/B/E/S), whose estimates CNBC uses to identify earnings misses, state in their marketing materials. Specifically, I/B/E/S claims it “removes’ stale … Read more
Why do firms pay dividends? A well-known finance theory proposes that, in frictionless markets, dividends are irrelevant for firm valuation because an investor’s wealth does not change if the firm holds a dollar in the bank or if the firm returns a dollar to an investor through a dividend who then holds it in the bank. Despite this, roughly 40 percent of public firms pay dividends and, because they are rarely cut, dividends provide investors with a predictable stream of cash. Research has had limited success in explaining why firms pay dividends (i.e. the benefits), but the costs, such … Read more
How do companies based in countries with weak government institutions earn the trust of minority investors and raise capital? Where the rule of law and government enforcement cannot control corruption, insiders seem free to expropriate their company’s resources, making it essential for them to somehow assure potential outside investors that they can be trusted. Establishing trust is especially important for growing firms that have profitable investment opportunities and are most in need of external capital.
One promising approach to building trust might be to pay a dividend – there is credibility in cash. However, paying a fixed dividend consistently, as … Read more