A Re-Examination of Analysts’ Superiority over Time-Series Forecasts of Annual Earnings
41 Pages Posted: 29 Dec 2009 Last revised: 15 Feb 2012
Date Written: 2012
Abstract
We re-examine the widely held belief that analysts’ earnings per share (EPS) forecasts are superior to random walk (RW) time-series forecasts. We investigate whether analysts’ annual EPS forecasts are superior, and if so, under what conditions. Simple RW EPS forecasts are more accurate than analysts’ forecasts over longer horizons, for smaller or younger firms, and when analysts forecast negative or large changes in EPS. We also compare the accuracy of a third forecast of longer-term earnings based on a naïve extrapolation of analysts’ one-year-ahead forecasts. Surprisingly, this naïve extrapolation provides the most accurate estimate of long-term (two- and three-year-ahead) earnings. These findings recharacterize prior generalizations about the superiority of analysts’ forecasts and suggest that they are incomplete, misleading, or both. Moreover, in certain settings, researchers can rely on forecasts other than these explicit forecasts.
Keywords: analyst forecasts, earnings per share, time-series forecasts, earnings forecasts, earnings expectations
JEL Classification: M43, M41
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Rate Regulation, Competition, and Loss Reserve Discounting by Property-Casualty Insurers
-
Ball and Brown (1968): A Retrospective
By Ray Ball and Philip R. Brown
-
Firm Size and the Information Content of Annual Earnings Announcements: Australian Evidence
By H. Chan, Robert W. Faff, ...
-
The Discretionary Use of Present Value-Based Measurements By Property-Casualty Insurers
-
By Theodore E. Christensen, Toni Q. Smith, ...