An Empirical Assessment of the Credibility Premium Associated with Meeting or Beating Both Time-Series Earnings Expectations and Analysts' Forecasts

38 Pages Posted: 22 Nov 2003

See all articles by Nicholas Dopuch

Nicholas Dopuch

Washington University in St. Louis - John M. Olin Business School

Chandra Seethamraju

Franklin Templeton Investments

Weihong Xu

State University of New York (SUNY) - Accounting & Law

Date Written: November 2003

Abstract

Recent research results indicate a market premium for firms that met or beat analysts' forecasts. We find evidence consistent with these results. More important, however, we find a market premium for firms that met or beat time-series forecasts, and also the highest market premium for firms that met or beat both analysts' and time-series forecasts, relative to firms that met or beat one or neither forecast. In fact, there is no premium for firms that met or beat only analysts' or only time-series forecasts. Investors seem to consider both analysts' and time-series forecasts jointly, with the act of meeting or beating both forecasts providing the most credible signal of superior future financial performance. This 'credibility' premium to firms that met or beat time-series forecasts (as proxied for by the Foster model, 1977) is in addition to the premium for meeting or beating analysts' forecasts. The premium is supported by assessments of future financial performance over the two subsequent years and by tests of the predictability of earnings for the following quarter. Finally, we find that abnormal trading was greatest when both forecasts were met or beaten, compared to when only one or the other or neither forecast was met or beaten. This is further evidence that investors view the meeting or beating of both forecasts as the strongest signal of enhanced credibility in reported earnings.

Keywords: analysts' forecasts, time-series expectations

JEL Classification: M41, G29, G12

Suggested Citation

Dopuch, Nicholas and Seethamraju, Chandrakanth and Xu, Weihong, An Empirical Assessment of the Credibility Premium Associated with Meeting or Beating Both Time-Series Earnings Expectations and Analysts' Forecasts (November 2003). Available at SSRN: https://ssrn.com/abstract=471622 or http://dx.doi.org/10.2139/ssrn.471622

Nicholas Dopuch (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-4564 (Phone)
314-935-6359 (Fax)

Chandrakanth Seethamraju

Franklin Templeton Investments ( email )

Multi Asset Strategies
P.O. Box 997152
San Mateo, CA 95899-7152
United States

Weihong Xu

State University of New York (SUNY) - Accounting & Law ( email )

Buffalo, NY 14260
United States
716-645-5434 (Phone)
716-645-3823 (Fax)

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