Biases in Analysts' Multiyear Forecasted Income Statements, Balance Sheets, and Cash Flow Statements

48 Pages Posted: 15 Jul 2017

See all articles by John R. M. Hand

John R. M. Hand

University of North Carolina Kenan-Flagler Business School

Nicholas Martin

Cornerstone Research

Date Written: July 15, 2017

Abstract

We evaluate sell-side equity analysts’ multiyear forecasted income statements, balance sheets and cash flow statements, and the profitability, efficiency and leverage ratios that they imply. Using both small- sample data extracted manually from Investext PDFs, and large-sample data taken from the I/B/E/S non-EPS archival detail history file, we find that analysts’ long-horizon financial statements contain many biases, many but not all of which are optimistic. Analysts make highly optimistic forecasts of long-horizon EPS, ROE, ROA, ROS and asset turnover, driven by overly bullish projections about revenues and all common-sized expenses except income tax, which they forecast pessimistically. Analysts are optimistic about both long-horizon operating cash flows and operating accruals, and while they are unbiased in their forecasts of long-horizon total assets, they underestimate long-horizon debt and overestimate long-horizon equity. Our regressions support the view that analysts strategically inflate their long-horizon forecasts of EPS the more intangible and hard-to-verify are the firm’s assets.

Keywords: Forecasted financial statements, multiyear, long-horizon, analysts, biases

JEL Classification: G17, M41

Suggested Citation

Hand, John R. M. and Martin, Nicholas, Biases in Analysts' Multiyear Forecasted Income Statements, Balance Sheets, and Cash Flow Statements (July 15, 2017). Available at SSRN: https://ssrn.com/abstract=3003267 or http://dx.doi.org/10.2139/ssrn.3003267

John R. M. Hand (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3173 (Phone)
919-962-4727 (Fax)

Nicholas Martin

Cornerstone Research ( email )

Boston, MA 02115
United States

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