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
Date Written: September 11, 2010
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: Suggested Citation