Using Analysts' Growth Forecasts to Estimate Shareholder Required Rates of Return

Abstract

Shareholder required rates of return play key roles in establishing economic criteria for resource allocation in many corporate and regulatory decisions. Theory dictates that such returns should be forward-looking return requirements that take into account the of the specific equity investment. Estimation of such returns, however, presents numerous and difficult problems. Although theory clearly calls for a forward-looking required return, investigators, lacking a superior alternative, often resort to averages of historical realizations. One primary example is the determination of equity required return as a least risk rate plus a premium where an equity premium is calculated as an average of past differences between equity returns and returns on debt instruments. The historical studies of Ibbotson et al. [9]