Analyst Forecasts: Sales and Profit Margins

Review of Accounting Studies, Forthcoming

47 Pages Posted: 1 Apr 2016 Last revised: 8 Oct 2019

See all articles by Agnes Cheng

Agnes Cheng

Hong Kong Polytechnic University; University of Oklahama

K.C. Kenneth Chu

The University of Hong Kong

James A. Ohlson

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: October 5, 2019

Abstract

Sales and profit margins are two popular earnings components discussed in the media. We study properties of one-year-ahead analyst forecasts of these two components. As sales are in dollar amounts and profit margin is a ratio, we propose robust statistical methods to assess and contrast their forecast properties. We find that four performance properties associated with earnings forecasts—optimism, relative accuracy with respect to benchmark model forecasts, forecast suboptimality, and serial correlation of forecast errors—apply to both sales and profit margins. Sales forecasts, in general, perform better than profit margin forecasts. Further evidence also shows that sales forecasts perform better than profit margin forecasts in terms of how their forecast errors explain earnings forecast errors and how realized surprises affect adjustments of the respective forecasts. We also find that a better information environment, surrogated by size, improves sales forecasts more than profit margin forecasts. All of these findings suggest that forecasting profit margins is inherently more difficult than forecasting sales.

Keywords: Analyst forecasts

JEL Classification: G17

Suggested Citation

Cheng, Agnes and Chu, Kenneth and Ohlson, James A., Analyst Forecasts: Sales and Profit Margins (October 5, 2019). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2757562 or http://dx.doi.org/10.2139/ssrn.2757562

Agnes Cheng

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

University of Oklahama ( email )

307 West Brooks
Norman, OK 73019-4004
United States

Kenneth Chu

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
Hong Kong

James A. Ohlson (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon
China

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