Relative Accuracy of Judgmental and Extrapolative Methods in Forecasting Annual Earnings

Abstract

This paper identifies and analyses previously published studies on annual earnings forecasts. Comparisons of forecasts produced by management, analysts, and extrapolative techniques indicated that: (1) management forecasts were superior to professional analyst forecasts (the mean absolute percentage errors were 15.9 and 17.7, respectively, based on five studies using data from 1967-1974) and (2) judgmental forecasts (both management and analysts) were superior to extrapolation forecasts on 14 of 17 comparisons from 13 studies using data from 1964-1979 (the mean absolute percentage errors were 21.0 and 28.4 for judgment and extrapolation, respectively). These conclusions, based on recent research, differ from those reported in previous reviews, which commented on less than half of the studies identified here.

Keywords: Annual, financial forecasts, Judgment vs. extrapolation