A Re-Examination of Analysts’ Superiority over Time-Series Forecasts of Annual Earnings

41 Pages Posted: 29 Dec 2009 Last revised: 15 Feb 2012

See all articles by Mark T Bradshaw

Mark T Bradshaw

Boston College

Michael S. Drake

Brigham Young University - Marriott School

James N. Myers

University of Tennessee, Knoxville - College of Business Administration

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

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

Bradshaw, Mark T and Drake, Michael S. and Myers, James N. and Myers, Linda A., A Re-Examination of Analysts’ Superiority over Time-Series Forecasts of Annual Earnings (2012). Review of Accounting Studies, Vol. 17, No. 4, 2012. Available at SSRN: https://ssrn.com/abstract=1528987 or http://dx.doi.org/10.2139/ssrn.1528987

Mark T Bradshaw (Contact Author)

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Michael S. Drake

Brigham Young University - Marriott School ( email )

United States

James N. Myers

University of Tennessee, Knoxville - College of Business Administration ( email )

Haslam Business Building
Knoxville, TN
United States

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

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