Why do EPS Forecast Error and Dispersion not Vary with Scale? Implications for Analyst and Managerial Behavior

Journal of Accounting Research, Forthcoming

50 Pages Posted: 12 Sep 2010

See all articles by Foong Soon Cheong

Foong Soon Cheong

Nanyang Technological University (NTU) - Division of Accounting

Jacob K. Thomas

Yale School of Management

Date Written: September 11, 2010

Abstract

We document a counter-intuitive finding regarding analyst forecasts of quarterly earnings per share (EPS): magnitudes of deviations from benchmarks - individual forecasts versus consensus (dispersion) and consensus versus actual (forecast error) - do not vary with scale. Seasonally-differenced EPS, or time-series forecast error, also exhibits substantial lack of variation with scale, but only for firms followed by analysts. This lack of variation with scale is not observed for analyst and time-series forecasts for a) EPS for some countries, b) sales and cash flows for all countries, and c) stock splits. We propose and investigate different explanations for these puzzling regularities that have important implications for practice and research. We believe the cause is managerial smoothing of EPS designed to reduce across-firm variation in EPS volatility.

Keywords: Analyst Forecast, Forecast Error, Dispersion, Price Deflation

JEL Classification: G10, M41

Suggested Citation

Cheong, Foong Soon and Thomas, Jacob Kandathil, Why do EPS Forecast Error and Dispersion not Vary with Scale? Implications for Analyst and Managerial Behavior (September 11, 2010). Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1675603

Foong Soon Cheong

Nanyang Technological University (NTU) - Division of Accounting ( email )

Nanyang Business School
Singapore, 639798
Singapore

Jacob Kandathil Thomas (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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