How Are Analysts’ Forecasts Affected by High Uncertainty?
46 Pages Posted: 18 Aug 2013 Last revised: 10 Aug 2017
Date Written: May 1, 2017
This study examines whether key characteristics of analysts’ forecasts — timeliness, accuracy, and informativeness — change when investor demand for information is likely to be especially high, i.e., during periods of high uncertainty. Findings reveal that when uncertainty is high, analysts’ forecasts are more timely but less accurate. However, analysts’ forecasts are also more informative to the market, which is consistent with investors’ demand for timely information, even if it is less accurate. We observe these findings when market prices are increasing and decreasing, consistent with the findings resulting from uncertainty in general rather than just uncertainty associated with market declines. We also examine how timeliness, accuracy, and informativeness change in response to elevated levels of three sources of uncertainty — market, industry, and firm-level. We predict and find that analysts are better able to deal with heightened industry uncertainty, as reflected by greater timeliness with no loss in forecast accuracy. In contrast, analysts have greater difficulty dealing with heightened market uncertainty, as both timeliness and forecast accuracy decline.
Keywords: Financial analysts, earnings forecasts, uncertainty
JEL Classification: G14, M40
Suggested Citation: Suggested Citation