Reported Earnings and Analyst Forecasts as Competing Sources of Information: A New Approach

Posted: 19 Dec 2012

See all articles by Robert W. Faff

Robert W. Faff

University of Queensland

Heather M. Anderson

Monash University - Department of Economics

H. Chan

University of Melbourne - Department of Finance; Monash University - Department of Accounting

Yew Kee Ho

National University of Singapore (NUS) - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: December 12, 2012

Abstract

We apply a new methodology, modified Granger causality tests, to further analyze the information flows between earnings and forecasts. Our application focuses on the dynamic interaction between reported earnings and analysts’ forecasts. Based on long time series of analyst earnings forecasts and reported earnings, we provide formal and compelling evidence of bi-directional ‘causality’. Further, we report that the lag structure in information flows is longer than has been documented in the previous literature. This is consistent with our expectation that, in addition to past earnings reports, the forecasts themselves make a significant contribution to the information that is reflected in future earnings. However, the presence of feedback also suggests that past earnings reports, as well as past forecasts, are incorporated into later forecasts. Collectively, our findings imply that the information in earnings reports has inherent positive value and that forecasts do not fully substitute for earnings releases.

Keywords: analyst forecasts, granger causality, information flows, reported earnings

Suggested Citation

Faff, Robert W. and Anderson, Heather and Chan, Howard and Ho, Yew-Kee, Reported Earnings and Analyst Forecasts as Competing Sources of Information: A New Approach (December 12, 2012). Australian Journal of Management, Vol. 37, No. 3, 2012. Available at SSRN: https://ssrn.com/abstract=2190788

Robert W. Faff (Contact Author)

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Heather Anderson

Monash University - Department of Economics ( email )

Wellington Road
Clayton, Victoria 3
Australia

Howard Chan

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia

Yew-Kee Ho

National University of Singapore (NUS) - Department of Accounting ( email )

1 Business Link
Singapore, 117592
Singapore

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