The Predictability of Future Aggregate Earnings Growth and the Relation between Aggregate Analyst Recommendation Changes and Future Returns

The Accounting Review, (doi.org/10.2308/tar-2017-0720) Forthcoming

51 Pages Posted: 14 Apr 2020 Last revised: 7 May 2020

See all articles by Bruce K. Billings

Bruce K. Billings

Florida State University - Department of Accounting

Sami Keskek

Florida State University

Spencer Pierce

Florida State University - College of Business

Date Written: February 1, 2020

Abstract

We extend prior research examining the relation between aggregate recommendation changes and future returns by documenting that this relation varies over time as a function of the predictability of future earnings growth. When industry-level earnings growth is more predictable, we find that recommendation changes relate negatively to future returns. Our evidence suggests that this negative relation results from analysts revising recommendations upward for higher expected earnings growth but failing to adjust downward for a related decrease in investor risk aversion and demand for risk premia leading to lower expected returns. In contrast, when industry-level earnings growth is less predictable, we find that recommendation changes relate positively to future returns. However, this positive relation results from analysts and investors similarly underestimating earnings growth persistence. Overall, the evidence fails to support the claim that analysts’ recommendation changes incorporate aggregate information in a manner that adds value to investors by predicting future returns.

Keywords: Aggregate recommendation changes, aggregate earnings growth, aggregate future returns, risk, expected returns

JEL Classification: A10, E10, E44, E52, G11, G14, M40, M41

Suggested Citation

Billings, Bruce K. and Keskek, Sami and Pierce, Spencer, The Predictability of Future Aggregate Earnings Growth and the Relation between Aggregate Analyst Recommendation Changes and Future Returns (February 1, 2020). The Accounting Review, (doi.org/10.2308/tar-2017-0720) Forthcoming , Available at SSRN: https://ssrn.com/abstract=3548811

Bruce K. Billings (Contact Author)

Florida State University - Department of Accounting ( email )

Rovetta Business Bldg. (RBA)
College of Business
Tallahassee, FL 32306-1110
United States
850-644-7889 (Phone)
850-644-8234 (Fax)

Sami Keskek

Florida State University ( email )

Department of Accounting
College of Business
Tallahassee, FL 32306
United States

Spencer Pierce

Florida State University - College of Business ( email )

423 Rovetta Business Building
Tallahassee, FL 32306-1110
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
72
Abstract Views
361
rank
357,197
PlumX Metrics