Bank Earnings Forecasts, Risk and the Crisis

45 Pages Posted: 17 Oct 2011 Last revised: 19 Feb 2012

See all articles by Mario Anolli

Mario Anolli

Università Cattolica del S. Cuore

Elena Beccalli

Catholic University of the Sacred Heart of Milan

Philip Molyneux

University of Sharjah - College of Business Administration

Date Written: October 16, 2011

Abstract

This paper explores the ability of financial analysts to gauge the risk taken by banks and investigates the impact of the recent financial crisis. Using a sample of 36,343 analyst forecasts issued for 411 European banks over 2003-2009 we find that analyst forecasts are influenced by risk, the type of forecaster (optimistic or pessimistic) and vary over time. Optimistic analyst forecasts are significantly influenced by insolvency, market and credit risk over the acute-crisis period (July 2007 to March 2009) resulting in larger forecast errors. Of our risk indicators only credit risk (5-year CDS spreads) significantly influences analyst forecasts pre- and during the crisis period - higher levels of credit risk are reflected in less accurate forecasts. Leverage is negatively linked to forecast error as is market volatility which has a differential impact on forecasts over time. As analyst forecasts respond to different types of risk in a varying manner this questions the role of analysts in the market discipline process.

Keywords: Analyst Forecasts, Banks, Risk

JEL Classification: G14, G21, G32

Suggested Citation

Anolli, Mario and Beccalli, Elena and Molyneux, Philip, Bank Earnings Forecasts, Risk and the Crisis (October 16, 2011). Available at SSRN: https://ssrn.com/abstract=1944729 or http://dx.doi.org/10.2139/ssrn.1944729

Mario Anolli

Università Cattolica del S. Cuore ( email )

via Necchi 5
20123 Milano
Italy
+390272342465 (Phone)

Elena Beccalli (Contact Author)

Catholic University of the Sacred Heart of Milan ( email )

Largo Gemelli, 1
Milan, MI 20123
Italy

Philip Molyneux

University of Sharjah - College of Business Administration ( email )

University City Road
Sharjah, 27272
United Arab Emirates

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