Does Economic Policy Uncertainty Affect Analyst Forecast Accuracy?

Abstract

I investigate the dynamics of analyst forecast errors relative to economic policy uncertainty and find a significant positive relation between economic policy uncertainty and analyst forecast errors. A doubling of economic policy uncertainty is associated with a 4.29 percentage points increase in earnings (EPS) forecast errors, and the volatility and dispersion in analyst forecast errors are positively related to the economic policy uncertainty. Earnings forecast errors are higher for firms with higher sensitivity to the economic policy uncertainty, and the uncertainty factor retains its significance when compared to other risk factors. Additionally, firms with higher idiosyncratic risks show a higher sensitivity to the economic policy uncertainty.

Keywords: EPU, economic policy uncertainty, economic uncertainty, earnings forecasts, EPS forecasts, analyst forecast errors, analyst forecast accuracy, Oi-Hartman-Abel effect

JEL Classification: D80, E22, E32, E66, G10, G14, G17, G18, G30, G3