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Why do EPS Forecast Error and Dispersion not Vary with Scale? Implications for Analyst and Managerial Behavior

Foong Soon Cheong

Rutgers University

Jacob K. Thomas

Yale School of Management

September 11, 2010

Journal of Accounting Research, Forthcoming

We document a counter-intuitive finding regarding analyst forecasts of quarterly earnings per share (EPS): magnitudes of deviations from benchmarks - individual forecasts versus consensus (dispersion) and consensus versus actual (forecast error) - do not vary with scale. Seasonally-differenced EPS, or time-series forecast error, also exhibits substantial lack of variation with scale, but only for firms followed by analysts. This lack of variation with scale is not observed for analyst and time-series forecasts for a) EPS for some countries, b) sales and cash flows for all countries, and c) stock splits. We propose and investigate different explanations for these puzzling regularities that have important implications for practice and research. We believe the cause is managerial smoothing of EPS designed to reduce across-firm variation in EPS volatility.

Number of Pages in PDF File: 50

Keywords: Analyst Forecast, Forecast Error, Dispersion, Price Deflation

JEL Classification: G10, M41

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Date posted: September 12, 2010  

Suggested Citation

Cheong, Foong Soon and Thomas, Jacob K., Why do EPS Forecast Error and Dispersion not Vary with Scale? Implications for Analyst and Managerial Behavior (September 11, 2010). Journal of Accounting Research, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1675603

Contact Information

Foong Soon Cheong
Rutgers University ( email )
1 Washington Park #944
Newark, NJ 07102
United States
Jacob Kandathil Thomas (Contact Author)
Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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