Tracking Analysts' Forecasts Over the Annual Earnings Horizon: Are Analysts' Forecasts Optimistic or Pessimistic?

45 Pages Posted: 21 Jul 1999

See all articles by Scott A. Richardson

Scott A. Richardson

AQR Capital Management, LLC; London Business School

Siew Hong Teoh

University of California, Irvine - Accounting Area

Peter D. Wysocki

Boston University Questrom School of Business

Date Written: June 1999

Abstract

This paper examines the dynamic behavior of analysts' earnings forecasts over the twelve months preceding annual earnings announcements. We investigate the claim that analysts make optimistic forecasts at the start of the year and then 'walk down' their estimates to a level the firm is likely to beat by the end of the year. The sample consists of I/B/E/S individual-analyst forecasts for the period 1983-1997. In the post-1992 period, we find strong evidence of a switch from upward-biased to downward-biased forecasts of annual earnings as the announcement date approaches. Forecast pessimism is strongest for high market-to-book firms, for large firms, and in periods when real GDP is growing. We also find that analysts forecasts are more accurate for firms involved in new equity issuance. Finally, we find that pessimistic forecasts are more frequent in years when firms report positive special items, high cash flows from operations and high working capital accruals.

JEL Classification: G14, M41, G29

Suggested Citation

Richardson, Scott Anthony and Teoh, Siew Hong and Wysocki, Peter D., Tracking Analysts' Forecasts Over the Annual Earnings Horizon: Are Analysts' Forecasts Optimistic or Pessimistic? (June 1999). Available at SSRN: https://ssrn.com/abstract=168191 or http://dx.doi.org/10.2139/ssrn.168191

Scott Anthony Richardson

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Siew Hong Teoh

University of California, Irvine - Accounting Area ( email )

Irvine, CA 92697-3125
United States

Peter D. Wysocki (Contact Author)

Boston University Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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