The Effect of Extreme Accounting Events on Analyst Following and Forecast Accuracy

Posted: 28 Jul 1997

See all articles by Andrew W. Alford

Andrew W. Alford

Goldman, Sachs & Co.

Philip G. Berger

University of Chicago - Chookaszian Accounting Research Center

Date Written: June 1997

Abstract

This paper uses a simultaneous equations system to examine the effect of extreme accounting events in the previous fiscal year on analyst following and forecast accuracy. We measure extreme accounting events by the magnitude of a company's restructuring charges and by an information signal based on the fundamental variables in Lev and Thiagarajan (1993). Our results indicate that the existence of an extreme accounting event impairs analysts' ability to predict future earnings. These results are consistent with our hypothesis and suggestions in the popular press that market participants have difficulty understanding the implications of extreme accounting events for future operating performance. We also find that forecast accuracy and analyst following are determined simultaneously, with greater accuracy associated with higher analyst following. Our results suggest analysts prefer to follow companies for which earnings are easier to forecast, consistent with analysts complementing rather than substituting for other sources of information.

JEL Classification: G12, D82, M41

Suggested Citation

Alford, Andrew W. and Berger, Philip G., The Effect of Extreme Accounting Events on Analyst Following and Forecast Accuracy (June 1997). Available at SSRN: https://ssrn.com/abstract=8553

Andrew W. Alford (Contact Author)

Goldman, Sachs & Co. ( email )

85 Broad Street
New York, NY 10004
United States
212-902-0867 (Phone)
212-357-6563 (Fax)

Philip G. Berger

University of Chicago - Chookaszian Accounting Research Center ( email )

1101 East 58th Street
Chicago, IL 60637-1561
United States

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