Reported Earnings and Analyst Forecasts as Competing Sources of Information: A New Approach

50 Pages Posted: 4 Mar 2009

See all articles by Heather M. Anderson

Heather M. Anderson

Monash University - Department of Economics

H. Chan

University of Melbourne - Department of Finance; Monash University - Department of Accounting

Robert W. Faff

University of Queensland

Yew Kee Ho

National University of Singapore (NUS) - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: March 4, 2009

Abstract

Givoly (1985) provides formal evidence on the relation between the past history of earnings and their own forecast. Our study uses a new methodology, modified Granger causality tests, to further analyze the information flows between earnings and forecasts. Our application of this widely acclaimed time series approach complements existing cross-sectional studies by abstracting from stock market reactions to information, and focusing on the dynamic interaction between reported earnings and analysts' forecasts. Based on long time series of analyst earnings forecasts and reported earnings, we provide formal and compelling evidence of bi-directional causality. Further, we report that the lag structure in information flows is longer than has been documented in the previous literature. This is consistent with our expectation that, in addition to past earnings reports, the forecasts themselves make a significant contribution to the information that is reflected in future earnings. However, the presence of feedback also suggests that past earnings reports as well as past forecasts are incorporated into later forecasts. Collectively, our findings imply that the information in earnings reports has inherent positive value and that forecasts do not fully substitute for earnings releases.

Keywords: Analyst's forecasts, Reported earnings, Granger causality, Information flows

JEL Classification: M41, G29, C32

Suggested Citation

Anderson, Heather and Chan, Howard and Faff, Robert W. and Ho, Yew-Kee, Reported Earnings and Analyst Forecasts as Competing Sources of Information: A New Approach (March 4, 2009). Available at SSRN: https://ssrn.com/abstract=1353129 or http://dx.doi.org/10.2139/ssrn.1353129

Heather Anderson

Monash University - Department of Economics ( email )

Wellington Road
Clayton, Victoria 3
Australia

Howard Chan

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Yew-Kee Ho (Contact Author)

National University of Singapore (NUS) - Department of Accounting ( email )

1 Business Link
Singapore, 117592
Singapore

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