Identifying Consensus Analysts’ Earnings Forecasts that Correctly and Incorrectly Predict an Earnings Increase

27 Pages Posted: 7 Jul 2011

See all articles by Matthew M. Wieland

Matthew M. Wieland

Miami University of Ohio - Department of Accountancy

Date Written: June/July 2011

Abstract

Abstract:  This study observes that consensus analysts’ forecasts incorrectly predict an increase in one‐year‐ahead earnings in 28.9% of the firm‐year observations, and that correct (incorrect) firms generate 14.8% (−25.7%) abnormal returns over the next year, on average. The ability to anticipate when analysts’ predicted earnings increases will or will not materialize is therefore potentially important to investors and investment fund managers. This paper develops an empirical model that predicts when analysts’ forecasts will correctly (versus incorrectly) anticipate the direction of the change in upcoming earnings, by exploiting information in (a) the nature of analysts’ characteristics and firms’ earnings predictability, and (b) fundamental analysis of firms’ earnings growth. The model successfully distinguishes between forecasted earnings increases that do (versus do not) materialize and a trading strategy that takes long (short) positions in the portfolio the model identifies as more (less) likely correct generates an average annual abnormal return of 14.1%.

Keywords: earnings predictions, financial statement analysis, abnormal returns, sell side analysts

Suggested Citation

Wieland, Matthew M., Identifying Consensus Analysts’ Earnings Forecasts that Correctly and Incorrectly Predict an Earnings Increase (June/July 2011). Journal of Business Finance & Accounting, Vol. 38, Issue 5‐6, pp. 574-600, 2011, Available at SSRN: https://ssrn.com/abstract=1880454 or http://dx.doi.org/10.1111/j.1468-5957.2011.02236.x

Matthew M. Wieland (Contact Author)

Miami University of Ohio - Department of Accountancy ( email )

310 Laws Hall
Oxford, OH 45056-1675
United States

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