Do Analysts Forecasts Vary Too Much?

Journal of Financial Reporting, Forthcoming

61 Pages Posted: 23 Jan 2015 Last revised: 12 Nov 2015

See all articles by Russell J. Lundholm

Russell J. Lundholm

University of British Columbia - Sauder School of Business

Rafael Rogo

Indiana University - Kelley School of Business - Department of Accounting

Date Written: June 15, 2015

Abstract

In this paper we examine the time-series and cross-sectional volatility in analyst forecasts. We derive a bound on the degree of variation in forecasts, analogous to the variance bound literature in finance, and document the frequency and circumstances surrounding violations of this bound. We find that the time-series of individual forecasts are excessively volatile approximately 17 percent of the time, affecting up to 50 percent of the aggregate market value of stocks. We also find that the market-wide frequency of excessively volatile forecasts in a year is positively correlated with aggregate stock market volatility and market sentiment, and is negatively correlated with future aggregate stock returns. We find that the cross-section of analyst forecasts are excessively volatile approximately eight percent of the time, and observe that excessively volatile forecasts are more common for larger firms. As a precursor to identifying the underlying causes and consequences of excessively volatile forecasts, we describe the time period characteristics, analyst characteristics, and firm characteristics that are associated with these events.

Keywords: analyst forecasts, volatility, optimality

JEL Classification: M41, G12, G14

Suggested Citation

Lundholm, Russell J. and Rogo, Rafael, Do Analysts Forecasts Vary Too Much? (June 15, 2015). Journal of Financial Reporting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2552791 or http://dx.doi.org/10.2139/ssrn.2552791

Russell J. Lundholm (Contact Author)

University of British Columbia - Sauder School of Business ( email )

2053 Main Hall
Vancouver, British Columbia V6T 1Z2
Canada

Rafael Rogo

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

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