Investors’ Misweighting of Firm-level Information and the Market’s Expectations of Earnings

54 Pages Posted: 16 Jul 2014 Last revised: 23 Jan 2019

See all articles by Sami Keskek

Sami Keskek

Florida State University

James N. Myers

University of Tennessee, Knoxville - College of Business Administration

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Date Written: Jan 2019

Abstract

Recent studies re-examine the ability of fundamental earnings forecasts to proxy for the market’s expectations of earnings because analyst forecasts are biased and are available for only a subset of firms. We find that as a proxy for market expectations, fundamental forecasts contain systematic measurement errors analogous to those in analysts’ biased forecasts. This occurs because when estimating future earnings, investors misweight the information in many firm-level variables but fundamental forecasts are formed using the historically efficient weights on firm-level variables. Thus, we develop an alternative ex ante proxy for the market’s expectations of future earnings (‘the implied market forecast’) using the historical (and inefficient) weights, as reflected in stock returns, that the market places on firm-level variables. A trading strategy based on the implied market forecast error, which is measured as the difference between the implied market forecast and the fundamental forecast, generates excess returns of about 8% per year. These returns cannot be explained by investors’ reliance on analysts’ biased forecasts. Overall, our results reveal that market expectations differ from both fundamental forecasts and analysts’ forecasts.

Keywords: Market expectations; Mispricing

JEL Classification: M4, M40, M41

Suggested Citation

Keskek, Sami and Myers, James N. and Myers, Linda A., Investors’ Misweighting of Firm-level Information and the Market’s Expectations of Earnings (Jan 2019). Available at SSRN: https://ssrn.com/abstract=2466448 or http://dx.doi.org/10.2139/ssrn.2466448

Sami Keskek

Florida State University ( email )

Department of Accounting
College of Business
Tallahassee, FL 32306
United States

James N. Myers

University of Tennessee, Knoxville - College of Business Administration ( email )

Haslam Business Building
Knoxville, TN
United States

Linda A. Myers (Contact Author)

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
179
rank
164,989
Abstract Views
1,435
PlumX Metrics
!

Under construction: SSRN citations while be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information