The Accuracy and Complementarity of Analyst and Earnings-to-Price-Ratio-Based Forecasts of Annual Earnings

Lancaster University Working Paper No. 95/006

Posted: 27 Feb 1998

See all articles by Chi-Chun Liu

Chi-Chun Liu

National Chengchi University

Peter F. Pope

Bocconi University; London School of Economics and Political Science

Stephen G. Ryan

New York University (NYU) - Leonard N. Stern School of Business

Paul Zarowin

New York University (NYU) - Department of Accounting

Date Written: April 1995

Abstract

We compare the accuracy of analyst (I/B/E/S consensus) and earnings-to-price ratio (E/P)-based forecasts of annual earnings across firms. We find that generalizations of Beaver Lambert and Morse's (BLM 1980) E/P-based forecasting model are more accurate than analyst forecasts both for most firms and on average though analyst forecasts are more accurate for the two lowest and the highest E/P decile firms. This result reflects prior research's finding that analyst forecasts are biased and do not fully incorporate the implications of the current annual price and earnings changes for future earnings. Only when the errors in analyst forecasts due to these sources comprise a relatively unimportant portion of the subsequent earnings change (i.e. in the extreme E/P deciles) do analysts beat E/P-based models.

JEL Classification: M41

Suggested Citation

Liu, Chi-Chun and Pope, Peter F. and Ryan, Stephen G. and Zarowin, Paul, The Accuracy and Complementarity of Analyst and Earnings-to-Price-Ratio-Based Forecasts of Annual Earnings (April 1995). Lancaster University Working Paper No. 95/006, Available at SSRN: https://ssrn.com/abstract=55508

Chi-Chun Liu

National Chengchi University

No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei 11623
Taiwan

Peter F. Pope (Contact Author)

Bocconi University ( email )

Dept of Accounting
Milan, 20136
Italy

London School of Economics and Political Science ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Stephen G. Ryan

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street, Suite 10-73
New York, NY 10012-1118
United States
212-998-0020 (Phone)

Paul Zarowin

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street, Suite 400
422 Tisch Hall
New York, NY 10012-1118
United States
212-998-0015 (Phone)
212-995-4004 (Fax)

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