An Additional Source of Financial Analysts’ Earnings Forecast Errors: Imperfect Adjustments for Cost Behavior

Posted: 30 Dec 2010

See all articles by Myungsun Kim

Myungsun Kim

SUNY at Buffalo

Jenice J. Prather-Kinsey

University of Alabama at Birmingham

Date Written: 2010

Abstract

We test a hypothesis that financial analysts use a simple algorithm of an equal growth rate for expenses as is for sales when they forecast corporate earnings by examining the errors in analysts’ earnings forecasts. If expenses change at a lower rate than sales in absolute terms due to the fixed portion of expenses, then analysts’ forecasted expenses will be higher (lower) than actual when they forecast an increase (decrease) in sales, resulting in lower (higher) forecasted than actual earnings assuming that analysts have perfect sales forecasts. Using 3,220 individual financial analysts’ sales and earnings forecasts during the period of 1996-2005 for which sales forecast errors are close to zero, we find that the errors in analysts’ earnings forecasts are positively related to their expected sales growth rate. This result is consistent with the hypothesis that analysts’ imperfect adjustments of cost behavior result in systematic errors in their earnings forecasts.

Keywords: analysts' earnings forecast errors, cost behavior, sales forecasts, fixed costs

Suggested Citation

Kim, Myungsun and Prather-Kinsey, Jenice J., An Additional Source of Financial Analysts’ Earnings Forecast Errors: Imperfect Adjustments for Cost Behavior (2010). Journal of Accounting, Auditing and Finance, Vol. 25, No. 1. Available at SSRN: https://ssrn.com/abstract=1731967

Myungsun Kim (Contact Author)

SUNY at Buffalo ( email )

Buffalo, NY 14260
United States
716-645-7900 (Phone)

Jenice J. Prather-Kinsey

University of Alabama at Birmingham ( email )

Birmingham, AL 35294-4460
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,068
PlumX Metrics