Understanding Analysts' Use and Under-Use of Stock Returns and Other Analysts' Forecasts when Forecasting Earnings

47 Pages Posted: 27 Aug 2007 Last revised: 25 Oct 2015

See all articles by Michael B. Clement

Michael B. Clement

University of Texas at Austin - Department of Accounting

Jeffrey Hales

University of Texas at Austin - Department of Accounting

Yanfeng Xue

George Washington University - Department of Accountancy

Date Written: June 2008

Abstract

In this study, we examine how analysts are affected by the public actions of investors and other analysts by closely examining how analysts revise their earnings forecasts after an earnings announcement. In particular, we hypothesize that analysts observe the actions of investors and other analysts in order to more accurately forecast earnings and have the expertise to determine when these actions are most informative about future earnings. Consistent with our hypotheses, we find that analysts revise their earnings forecasts more strongly in response to returns and other analysts' revisions when these signals are more informative about future earnings changes. We also find that, consistent with analysts being conservative while facing uncertain information, underreactions are strongest (not weakest) when analysts are responding most strongly to these signals (i.e., when the signals are most informative). Lastly, we find that analysts who are most sensitive to the informativeness of others' actions are relatively more accurate in forecasting earnings, suggesting that the ability to extract information from the actions of others serves as a source of expertise for at least some analysts.

Keywords: Financial analysts, earnings forecasts, market efficiency, learning

JEL Classification: D83, G14, G29, M41

Suggested Citation

Clement, Michael B. and Hales, Jeffrey and Xue, Yanfeng, Understanding Analysts' Use and Under-Use of Stock Returns and Other Analysts' Forecasts when Forecasting Earnings (June 2008). AAA 2008 Financial Accounting and Reporting Section (FARS) Paper, Available at SSRN: https://ssrn.com/abstract=1007085 or http://dx.doi.org/10.2139/ssrn.1007085

Michael B. Clement

University of Texas at Austin - Department of Accounting ( email )

2110 Speedway, Stop B6400
Austin, TX 78712
United States
512-471-0332 (Phone)
512-471-3904 (Fax)

Jeffrey Hales (Contact Author)

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-471-2163 (Phone)
512-471-3907 (Fax)

Yanfeng Xue

George Washington University - Department of Accountancy ( email )

School of Business and Public Management
Washington, DC 20052
United States

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