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How Do Analysts Use Their Earnings Forecasts in Generating Stock Recommendations?

44 Pages Posted: 12 Feb 2001  

Mark T Bradshaw

Boston College

Multiple version iconThere are 2 versions of this paper

Date Written: December 2000

Abstract

Sell-side analysts summarize their opinions about stocks with earnings forecasts and stock recommendations. Because earnings forecasts reflect future fundamentals, and future fundamentals determine value, forecasts and recommendations should be related. In this paper, I test for evidence of such a relation. Using analysts' earnings forecasts in conjunction with the residual income valuation model, I generate intrinsic value estimates for a comprehensive range of plausible calibrations of the model parameters. I find that analysts' stock recommendations are generally unrelated to the deviation of intrinsic value estimates from trading prices. Extending this analysis to consider value estimates generated by a valuation heuristic documented in prior research, I find the heuristic valuations to be strongly related to analysts' stock recommendations. Taken together, the evidence suggests that analysts incorporate their earnings forecasts into their recommendations in a manner consistent with earnings-based heuristics rather than a discounted present value valuation model. The evidence presented here for the behavior of analysts is consistent with prior evidence showing over-extrapolation of growth and earnings persistence in stock prices.

Keywords: Stock Recommendations, Earnings Forecasts, Valuation, Residual Income Model, PEG

JEL Classification: M41, G12, G29

Suggested Citation

Bradshaw, Mark T, How Do Analysts Use Their Earnings Forecasts in Generating Stock Recommendations? (December 2000). Available at SSRN: https://ssrn.com/abstract=256438 or http://dx.doi.org/10.2139/ssrn.256438

Mark T Bradshaw (Contact Author)

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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