Do Accurate Earnings Forecasts Facilitate Superior Investment Recommendations?

Posted: 25 Aug 2004

See all articles by Roger Loh

Roger Loh

Singapore Management University - Lee Kong Chian School of Business

G. Mujtaba Mian

Zayed University

Abstract

We find that analysts who issue more accurate earnings forecasts also issue more profitable stock recommendations. The average factor-adjusted return associated with the recommendations of analysts in the highest accuracy quintile exceeds the corresponding return for analysts in the lowest accuracy quintile by 1.27% per month. Our findings provide indirect empirical support for valuation models in the accounting and finance literatures (e.g., Ohlson, 1995) that emphasize the role of future earnings in predicting stock price movements. Our results also suggest that imperfectly efficient markets reward information gatherers, such as security analysts, for their costly activities in generating superior earnings forecasts.

Keywords: Earnings-based valuation models, earnings forecasts, stock recommendations, security analysts.

JEL Classification: G12, G14, G24, G29, M41

Suggested Citation

Loh, Roger and Mian, G. Mujtaba, Do Accurate Earnings Forecasts Facilitate Superior Investment Recommendations?. Journal of Financial Econmics, Vol. 80, No. 2, pp. 455-483, 2006 , Available at SSRN: https://ssrn.com/abstract=581601

Roger Loh

Singapore Management University - Lee Kong Chian School of Business ( email )

Lee Kong Chian School of Business
50 Stamford Rd
Singapore, 178899
Singapore

HOME PAGE: http://www.mysmu.edu/faculty/rogerloh/

G. Mujtaba Mian (Contact Author)

Zayed University

P.O. Box 19282
College of Business
Dubai, Dubai 19282
United Arab Emirates
+971568120604 (Phone)

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