The computation of implied cost of capital (ICC) is constrained by the lack of analyst forecasts for half of all firms. Hou et al. (J Account Econ 53:504–526, 2012, HVZ) present a cross-sectional model to generate forecasts in order to compute ICC. However, the forecasts from the HVZ model perform worse than those from a naïve random walk model and the ICCs show anomalous correlations with risk factors. We present two parsimonious alternatives to the HVZ model: the EP model based on persistence in earnings and the RI model based on the residual income model from Feltham and Ohlson (Contemp Account Res 11:689–732, 1996). Both models outperform the HVZ model in terms of forecast bias, accuracy, earnings response coefficients, and correlations of the ICCs with future returns and risk factors. We recommend that future research use the RI model or the EP model to generate earnings forecasts.

We investigate three potential channels of analyst value creation: improving fundamental performance through monitoring, reducing information asymmetry, and increasing investor recognition. We show that changes in investor recognition have consistent explanatory power for the market reaction to coverage initiations and terminations but find mixed evidence for changes in information asymmetry and no evidence for changes in fundamental performance as determinants of the market reaction. These results suggest that analysts create value for firms under their coverage by improving their investor recognition and not by monitoring or reducing information asymmetry.

We examine the financial health and performance of reverse mergers (RMs) that became active on U.S. stock markets between 2001 and 2010, particularly those from China (around 85 percent of all foreign RMs). As a group, RMs are early-stage companies that typically trade over the counter. However, Chinese RMs (CRMs) tend to be more mature and less speculative than either their U.S. counterparts or a group of exchange-industry-size-matched firms. As a group, CRMs outperformed their matched peers from inception through the end of 2013, even after including most of the firms accused of accounting fraud. CRMs that receive private investment in public equity (PIPE) financing from sophisticated investors perform particularly well. Overall, despite the negative publicity, we find little evidence that CRMs are inherently toxic investments. Our results shed light on the risk-performance trade-off for CRMs, as well as the delicate balance between credibility and access in well-functioning markets.