Patterns in Analysts’ Long-Term Earnings Forecasts

CFA Digest ◽  
2008 ◽  
Vol 38 (2) ◽  
pp. 55-56
Author(s):  
Daniel J. Larocco
Keyword(s):  
Earnings Forecasts

Analysts’ Incentives to Overweight Management Guidance When Revising Their Short-Term Earnings Forecasts

2010 ◽  
Vol 85 (5) ◽  
pp. 1617-1646 ◽  
Author(s):  
Mei Feng ◽  
Sarah McVay
Keyword(s):  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
Investment Banking ◽  
Equity Offerings ◽  
Short Term ◽  
Management Guidance ◽  
Banking Business

ABSTRACT: We document that, when revising their short-term earnings forecasts in response to management guidance, analysts wishing to curry favor with management weight the guidance more heavily than predicted, based on the credibility and usefulness of the guidance. This overweighting of guidance is present prior to equity offerings and other events that could lead to investment banking business. Although analysts sacrifice their forecast accuracy by overweighting management guidance, they appear to benefit, on average, by subsequently gaining the underwriting business for their banks. Thus, while analysts wishing to please managers are optimistic in their long-term earnings forecasts, they take their cue from management when determining their short-term earnings forecasts.

Patterns in Analysts' Long-Term Earnings Forecasts

2007 ◽  
Vol 16 (4) ◽  
pp. 129-137
Author(s):  
Rich Fortin ◽  
James H Gilkeson ◽  
Stuart E Michelson
Keyword(s):  
Earnings Forecasts

scholarly journals Earnings Forecast Optimism For U.S. Vs. Non-U.S. Firms

2013 ◽  
Vol 12 (11) ◽  
pp. 1491
Author(s):  
David Salerno ◽  
Nathan Jeppson
Keyword(s):  
Task Complexity ◽  
Financial Analysts ◽  
Forecast Accuracy ◽  
Earnings Forecasts ◽  
International Investment ◽  
Growth Potential ◽  
Earnings Forecast ◽  
Level Measurement ◽  
Investment Opportunities

This study examines whether financial analysts are more optimistic in their earnings forecasts for non-U.S. firms than they are for U.S. firms. Several areas of research motivate this examination. First, research shows that global economic influences, such as economic downturns and the desire to increase the international content of portfolios, encourage investors to seek out international investment opportunities in new markets. Second, literature also reveals that emerging markets provide superior growth potential; however, analyzing such firms could introduce task complexity which research finds to be associated with lower forecast accuracy. Finally, research shows that financial analysts cover firms of which they have a favorable opinion. Therefore, because of this literature, it is reasonable to expect that analysts make more optimistic forecasts (over-estimate errors) of the earnings potential of the non-U.S. firms that they choose to follow vs. U.S. firms. Using a summary level measurement of forecast optimism, the authors find that analysts forecasts are more optimistic for non-U.S. firms over both short and long-term horizons. In analyst-level tests, it was found that individual analysts produce more optimistic forecasts for non-U.S. firms in relation to their peers in the long-term; however, that optimism is reduced under short horizons. As portfolios become more internationally diversified, the result of this study will be useful to investors seeking analyst guidance about international investment opportunities.

How Do Analysts Use Their Earnings Forecasts in Generating Stock Recommendations?

2004 ◽  
Vol 79 (1) ◽  
pp. 25-50 ◽  
Author(s):  
Mark T. Bradshaw
Keyword(s):  
Explanatory Power ◽  
Earnings Forecasts ◽  
Model Specification ◽  
Residual Income ◽  
Present Value ◽  
Stock Recommendations ◽  
Earnings Growth ◽  
Residual Income Model ◽  
Income Model

This paper examines whether valuation estimates based on analysts' earnings forecasts are consistent with their stock recommendations. Because earnings forecasts are linked to value and recommendations reflect analysts' opinions of value relative to current price, earnings forecasts and stock recommendations should be linked in a predictable manner. I consider four possible valuation models of how earnings forecasts and stock recommendations are linked. These models include two specifications of the residual income model, a price-earnings-to-growth (PEG) model, and analysts' projections of long-term earnings growth. The results provide little evidence that analysts' recommendations are explained by either residual income model specification. However, both the PEG model and analysts' projections of long-term earnings growth explain analysts' stock recommendations. The relation between the valuation models and future returns is also examined. Analysts' projections of long-term earnings growth have the greatest explanatory power for stock recommendations, but investment strategies based on these projections have the least association with future excess returns. Overall, the evidence suggests that analysts' recommendations are more correlated with heuristic valuation models than with present value models, and buy-and-hold investors would earn higher returns relying on present value models that incorporate analysts' earnings forecasts than on analysts' recommendations.

Do Analysts Practice What They Preach and Should Investors Listen? Effects of Recent Regulations

2009 ◽  
Vol 84 (4) ◽  
pp. 1015-1039 ◽  
Author(s):  
Ran Barniv ◽  
Ole-Kristian Hope ◽  
Mark J. Myring ◽  
Wayne B. Thomas
Keyword(s):  
Earnings Forecasts ◽  
Residual Income ◽  
Growth Ratio ◽  
Stock Recommendations ◽  
Negative Relation ◽  
Large Sample ◽  
Analyst Behavior ◽  
Residual Income Valuation ◽  
Current Price

ABSTRACT: From 1994 to 1998, Bradshaw (2004) finds that analysts' stock recommendations relate negatively to residual income valuation estimates (scaled by current price) but positively to valuation heuristics based on the price-to-earnings-to-growth ratio and long-term growth. These results are surprising, especially considering that future returns relate positively to residual income valuation estimates and negatively to heuristics. Using a large sample of analysts for the 1993–2005 period, we consider whether recent regulatory reforms affect this apparent inconsistent analyst behavior. Consistent with the intent of these reforms, we find that the negative relation between analysts' stock recommendations and residual income valuations is diminishing following regulations. We also show that residual income valuations, developed using analysts' earnings forecasts, relate more positively with future returns. However, we document that stock recommendations continue to relate negatively with future returns. We conclude that recent regulations have affected analysts' outputs—forecasted earnings and stock recommendations—but investors should be aware that factors other than identifying mispriced stocks continue to influence how analysts recommend stocks.

The Role of “Other Information” in the Valuation of Foreign Income for U.S. Multinationals

2005 ◽  
Vol 20 (4) ◽  
pp. 355-377 ◽  
Author(s):  
Ole-Kristian Hope ◽  
Tony Kang
Keyword(s):  
Explanatory Power ◽  
Earnings Forecasts ◽  
Relevant Information ◽  
Omitted Variables ◽  
Foreign Markets ◽  
Current Accounting ◽  
Foreign Earnings ◽  
Other Information ◽  
Near Term

In this paper, we examine investors' valuation of the domestic and foreign components of total earnings after controlling for information beyond current earnings. Our sample consists of U.S. multinationals during the 1985-2002 period. In a prior study, Bodnar and Weintrop (1997) find that investors place a higher weight on foreign earnings than on domestic earnings in valuing securities, and that this finding can be explained in part by the higher growth opportunities in foreign markets. While this explanation is intuitively appealing, other possible explanations include the varying importance of information other than current accounting earnings in pricing securities and the possible misspecification of their model. One potentially important source of other information is information contained in revisions of analysts' forecasts of future (abnormal) earnings and terminal values. Excluding this information from the regression specification potentially leads to a correlated omitted variables problem. In this paper, we use the Liu and Thomas (2000) proxy for “other information,” which is derived from analysts' revisions of near-term and long-term earnings forecasts and discount rate changes. Including the “other information” variable greatly improves the explanatory power of the returns—earnings regression. Consistent with our predictions, we find that the bias resulting from excluding other value-relevant information has a greater effect on foreign earnings than on domestic earnings. Foreign earnings are no longer incrementally value relevant when we control for “other information.”

scholarly journals Updating great expectations: The effect of peer salary information on own-earnings forecasts

2020 ◽  
Author(s):  
Sam Jones ◽  
Ricardo Santos
Keyword(s):  
Job Search ◽  
Cognitive Skills ◽  
Public Information ◽  
Earnings Forecasts ◽  
Short Term ◽  
Great Expectations ◽  
Earnings Expectations ◽  
Salary Information ◽  
The Impact

How jobseekers set their earnings expectations is central to job search models. To study this process, we track the evolution of own-earnings forecasts over 18 months for a representative panel of university-leavers in Mozambique and estimate the impact of a wage information intervention. We sent participants differentiated messages about the average earnings of their peers, obtained from prior survey rounds. Demonstrating the stickiness of (initially optimistic) beliefs, we find an elasticity of own-wage expectations to this news of around 7 per cent in the short term and 16 per cent over the long term, which compares to a 22 per cent elasticity in response to unanticipated actual wage offers. We further find evidence of heterogeneous updating heuristics, where factors such as the initial level of optimism, cognitive skills, perceived reliability of the information, and valence of the news shape how wage expectations are updated. We recommend institutionalizing public information about earnings.

scholarly journals The effect of takeover defenses on long term and short term analysts’ earnings forecasts: The case of poison pills

2007 ◽  
Vol 4 (4) ◽  
pp. 140-144 ◽  
Author(s):  
Thomas A. Turk ◽  
Jeremy Goh ◽  
Candace E. Ybarra
Keyword(s):  
Earnings Forecasts ◽  
Security Analysts ◽  
Short Term ◽  
Takeover Defenses ◽  
Poison Pill ◽  
Poison Pills ◽  
One Year

This study examined the effect of poison pill adoption on long term and short earnings forecasts by security analysts. Our results provide no evidence of significant revisions in one-year or five-year earnings forecasts following the adoption of poison pills. We do find evidence, however, that firms adopt poison pills following a period of significant negative revisions in earnings forecasts. Our results suggest that poison pill adoptions may be a response to downward revisions in earnings forecasts

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