Performance of Analysts' Earnings Forecasts - Evidence from Finnish Emerging Markets 1987-2005

Research Institute of the Finnish Economy Discussion Paper No. 1160

Posted: 11 Jul 2009

See all articles by Mikko Kalevi Kepsu

Mikko Kalevi Kepsu

University of Turku - Turku School of Economics

Hannu J. Schadewitz

Turku School of Economics at the University of Turku - Department of Accounting & Finance

Markku J. Vieru

University of Lapland - Faculty of Social Sciences, Multidimensional Tourism Institute

Date Written: November 10, 2008

Abstract

Financial analysts comprise one important group of information intermediaries between firms and investors (Healy & Palepu, 2001). They have great potential to decrease information asymmetry between firms and investors, resulting in better allocation of capital. Analysts’ work is influenced by, among other things, the quality and quantity of information available from the target firms. Furthermore, analysts’ incentives could be influenced by the employer’s other affairs with the client. Our paper has three purposes: 1) to review the main research literature on analysts’ activity and performance, 2) to describe the development of analysts’ activity in the period 1987-2005 in a Finnish emerging market, and 3) to analyse the impact of market regulation and market cycles on analysts’ performance. Performance is studied in three dimensions: forecasting accuracy, forecast bias, and forecasting efficiency. Analysts’ data are based on I/B/E/S. Our analysis shows the rapid development of analysts’ activity, both in terms of the number of forecasts and longer forecasting horizons. Overall, the result supports the conclusion that analysts tend to be somewhat pessimistic in their Earnings per share (EPS) forecasts. Furthermore, the corrective actions taken have been somewhat sluggish (delays in EPS revisions). However, the forecasts improved significantly in the close before the actual EPS releases (0-1 month sample). Finally, analysts were not fully taking into account prior EPS development. This further supports the view that analysts underestimate the value of prior earnings change in their current earnings forecasting.

Keywords: analysts’ earnings forecasting, emerging markets

JEL Classification: M41, M43, M47

Suggested Citation

Kepsu, Mikko Kalevi and Schadewitz, Hannu J. and Vieru, Markku, Performance of Analysts' Earnings Forecasts - Evidence from Finnish Emerging Markets 1987-2005 (November 10, 2008). Research Institute of the Finnish Economy Discussion Paper No. 1160 , Available at SSRN: https://ssrn.com/abstract=1431849

Mikko Kalevi Kepsu

University of Turku - Turku School of Economics ( email )

Rehtorinpellonkatu 3
TURKU, FI-20500
Finland

Hannu J. Schadewitz (Contact Author)

Turku School of Economics at the University of Turku - Department of Accounting & Finance ( email )

Rehtorinpellonkatu 3
FIN-20500 Turku
Finland
+358 2 333 9321 (Phone)
+358 2 333 9350 (Fax)

HOME PAGE: http://www.utu.fi/en/people/hannu-schadewitz

Markku Vieru

University of Lapland - Faculty of Social Sciences, Multidimensional Tourism Institute ( email )

P.O. Box 122
Rovaniemi FIN-96101
Finland
+358 400 377641 (Phone)
+358 16 341 2600 (Fax)

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