On the Association Between Analysts' Forecast Errors and Past Stock Returns: A Re-Examination

2002 ◽  
Author(s):  
Xia NMI Chen ◽  
Qiang Cheng
Keyword(s):  
Stock Returns ◽  
Forecast Errors

The Trend in Firm Profitability and the Cross-Section of Stock Returns

2017 ◽  
Vol 92 (5) ◽  
pp. 1-32 ◽  
Author(s):  
Ferhat Akbas ◽  
Chao Jiang ◽  
Paul D. Koch
Keyword(s):  
Risk Factors ◽  
Stock Returns ◽  
Cross Section ◽  
The Other ◽  
Analyst Forecast ◽  
Forecast Errors ◽  
Earnings Surprise ◽  
Firm Profitability ◽  
Earnings Momentum ◽  
Jel Classifications

ABSTRACT This study shows that the recent trajectory of a firm's profits predicts future profitability and stock returns. The predictive information contained in the trend of profitability is not subsumed by the level of profitability, earnings momentum, or other well-known determinants of stock returns. The profit trend also predicts the earnings surprise one quarter later, and analyst forecast errors over the following 12 months, suggesting that sophisticated investors underreact to the information in the profit trend. On the other hand, we find no evidence of investor overreaction, and our results cannot be explained by well-known risk factors. JEL Classifications: G12; G14.

scholarly journals The Role of Anchoring Bias in the Equity Market: Evidence from Analysts’ Earnings Forecasts and Stock Returns

2012 ◽  
Vol 48 (1) ◽  
pp. 47-76 ◽  
Author(s):  
Ling Cen ◽  
Gilles Hilary ◽  
K. C. John Wei
Keyword(s):  
Stock Returns ◽  
Earnings Forecasts ◽  
Equity Market ◽  
Stock Splits ◽  
Forecast Errors ◽  
Forecast Revisions ◽  
Earnings Per Share ◽  
Earnings Surprises ◽  
Anchoring Bias

AbstractWe test the implications of anchoring bias associated with forecast earnings per share (FEPS) for forecast errors, earnings surprises, stock returns, and stock splits. We find that analysts make optimistic (pessimistic) forecasts when a firm’s FEPS is lower (higher) than the industry median. Further, firms with FEPS greater (lower) than the industry median experience abnormally high (low) future stock returns, particularly around subsequent earnings announcement dates. These firms are also more likely to engage in stock splits. Finally, split firms experience more positive forecast revisions, more negative forecast errors, and more negative earnings surprises after stock splits.

Identifying the News in Analysts’ Earnings Forecasts Revisions: An Alternative to the Random Walk Expectation

2021 ◽  
Author(s):  
Ray Pfeiffer ◽  
Karen Teitel ◽  
Susan Wahab ◽  
Mahmoud Wahab
Keyword(s):  
Random Walk ◽  
Stock Returns ◽  
Earnings Forecasts ◽  
Simple Random Walk ◽  
Analyst Forecast ◽  
Forecast Errors ◽  
Earnings Expectations ◽  
Forecast Revisions ◽  
Conditioning Information ◽  
Using Data

Previous research indicates that analysts’ forecasts are superior to time series models as measures of investors’ earnings expectations. Nevertheless, research also documents predictable patterns in analysts’ forecasts and forecast errors. If investors are aware of these patterns, analysts’ forecast revisions measured using the random walk expectation are an incomplete representation of changes in investors’ earnings expectations. Investors can use knowledge of errors and biases in forecasts to improve upon the simple random walk expectation by incorporating conditioning information. Using data from 2005 to 2015, we compare associations between market-adjusted stock returns and alternative specifications of forecast revisions to determine which best represents changes in investors’ earnings expectations. We find forecast revisions measured using a ‘bandwagon expectations’ specification, which includes two prior analysts’ forecast signals and provides the most improvement over random-walk-based revision measures. Our findings demonstrate benefits to considering information beyond the previously issued analyst forecast when representing investors’ expectations of analysts’ forecasts.

The Association between the Magnitude of Quarterly Earnings Forecast Errors and Risk-Adjusted Stock Returns

1984 ◽  
Vol 22 (2) ◽  
pp. 526 ◽  
Author(s):  
Robert L. Hagerman ◽  
Mark E. Zmijewski ◽  
Pravin Shah
Keyword(s):  
Stock Returns ◽  
Earnings Forecast ◽  
Forecast Errors ◽  
Quarterly Earnings

Earnings forecast errors in IPO prospectuses and their associations with initial stock returns

2001 ◽  
Vol 11 (2) ◽  
pp. 225-240 ◽  
Author(s):  
Gongmeng Chen ◽  
Michael Firth ◽  
Gopal V. Krishnan
Keyword(s):  
Stock Returns ◽  
Earnings Forecast ◽  
Forecast Errors

The Information Content of Quarterly Dividend Changes

1995 ◽  
Vol 10 (2) ◽  
pp. 293-317 ◽  
Author(s):  
Thomas J. Carroll
Keyword(s):  
Stock Returns ◽  
Earnings Forecasts ◽  
Positive Association ◽  
Earnings Forecast ◽  
Forecast Errors ◽  
Cross Sectional ◽  
Future Earnings ◽  
New Information ◽  
Dividend Announcements ◽  
Dividend Increases

This paper shows that dividend changes reveal new information about future earnings levels and are mixed with regard to future earnings variance. Revisions of Value Line earnings forecasts spanning up to five quarters have a positive association with unexpected dividend changes. Consistent with the negative association documented between dividend changes and future earnings variance, these revisions also exhibit greater cross-sectional dispersion following dividend decreases than following dividend increases. The relation between stock returns and earnings forecast errors following dividend announcements shows that dividend announcements convey information to the market about earnings in the next quarter and the quarter one year hence, but are not consistent with dividends revealing new information about the variance of future earnings.

Predicting Earnings Using a Model Based on Cost Variability and Cost Stickiness

2006 ◽  
Vol 81 (2) ◽  
pp. 285-307 ◽  
Author(s):  
Rajiv D. Banker ◽  
Lei (Tony) Chen
Keyword(s):  
Stock Returns ◽  
Forecast Accuracy ◽  
Predictive Ability ◽  
Forecast Model ◽  
Cash Flows ◽  
Substantial Improvement ◽  
Earnings Forecast ◽  
Forecast Errors ◽  
Operating Income ◽  
Consensus Forecasts

We evaluate the descriptive validity of the cost behavior model for profit analysis using Compustat data. For this purpose, we propose an earnings forecast model decomposing earnings into components that reflect (1) variability of costs with sales revenue and (2) stickiness in costs with sales declines. We evaluate the predictive ability of our model by benchmarking its performance in forecasting one-year-ahead returns on equity against that of two other time-series models based on line item information reported in the income statement and in the statement of cash flows. Specifically, we consider a model that disaggregates earnings into operating income and non-operating income components and another that disaggregates earnings into cash flows and accruals components. While all three models are less accurate than analysts' consensus forecasts that rely on a larger information set, we find that our model provides substantial improvement in forecast accuracy over the other two models that use only the line items in the financial statements. Finally, invoking the market efficiency assumption, we find that earnings forecast errors based on our model have greater relative information content than forecast errors based on the two alternative models based on financial statement information in explaining abnormal stock returns.

Strategic Management Forecasts and Accounting Choices: A Case of Employee Downsizing in Japan

2020 ◽  
Vol 19 (3) ◽  
pp. 91-109
Author(s):  
Keishi Fujiyama ◽  
Makoto Kuroki
Keyword(s):  
Stock Returns ◽  
Data Availability ◽  
Financial Statement ◽  
Fiscal Year ◽  
Forecast Errors ◽  
Management Forecasts ◽  
Reporting Practices ◽  
Accounting Choices ◽  
Using Data ◽  
Labor Negotiations

ABSTRACT Prior research shows that managers make income-decreasing accounting choices around labor negotiations and predicts that managers disclose bad news during labor negotiations. This study extends the literature by investigating whether disclosure and financial statement reporting practices are consistent during employee downsizing years. Using data from Japanese domestic firms during the period 2002–2016, we find that beginning-of-period management forecasts (i.e., disclosure) are positively associated with during-period negative stock returns for downsizing firms but not for non-downsizing firms. Also, downsizing firms report more conservative earnings at the end of the fiscal year (i.e., financial statement reporting). Our supplementary analyses show no difference in an association between management forecast errors and stock returns between downsizing and non-downsizing firms with during-period negative stock returns, nor in an association between discretionary accruals and employee downsizing. These results suggest that managers strategically inform firms' prospects during employee downsizing years. JEL Classifications: G34; J51; M41. Data Availability: Data are available from the public sources cited in the text.

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