Properties of the Variance of Analysts' Forecast of Earnings in Good-News and Bad-News Environments: Theory, Evidence and Usefulness

39 Pages Posted: 20 Sep 2008

See all articles by Davit Adut

Davit Adut

affiliation not provided to SSRN

Pradyot K. Sen

University of Washington Bothell

Praveen Sinha

California State University, Long Beach

Date Written: September 19, 2008

Abstract

This study documents that the variance of analysts' forecast of earnings is smaller when the expected or actual news of earnings is smaller when the expected or actual news about earnings is good (relative to when it is bad). An examination over the entire fiscal year provides evidence of earlier consensus building amongst analysts, as measured by reduction in variance over time in the good-news environment. Forecasts of earnings can be improved when variance of analysts' forecasts are used along with its mean. A trading strategy based on the variance of analysts' forecasts earns positive abnormal returns, when conditioned upon the nature of the news.

Keywords: analyst forecasts, analyst forecast dispersion, earnings prediction

JEL Classification: G14, G29, M41

Suggested Citation

Adut, Davit and Sen, Pradyot K. and Sinha, Praveen, Properties of the Variance of Analysts' Forecast of Earnings in Good-News and Bad-News Environments: Theory, Evidence and Usefulness (September 19, 2008). Available at SSRN: https://ssrn.com/abstract=1270682 or http://dx.doi.org/10.2139/ssrn.1270682

Davit Adut

affiliation not provided to SSRN

Pradyot K. Sen

University of Washington Bothell ( email )

UWBB 104 E
Beardslee Bulevard
Bothell, WA 98011-8246
United States
425-352-5432 (Phone)

Praveen Sinha (Contact Author)

California State University, Long Beach ( email )

1250 Bellflower Blvd
Long Beach, CA 90064
United States

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