A New Approach to Predicting Analyst Forecast Errors: Do Investors Overweight Analyst Forecasts?

So, Eric C.

doi:10.2139/ssrn.1714657

Cited by 134 publications

(109 citation statements)

References 71 publications

Supporting

Mentioning

101

Contrasting

Unclassified

Order By: Relevance

“…This assumption has great intuitive appeal, particularly for studying the measurement errors of ICCs that rely on analyst forecasts of future fundamentals. Because analysts can be slow to incorporate new information (e.g., Lys and Sohn, 1990;Elliot, Philbrick, and Wiedman, 1995;Guay et al, 2011;So, 2013), for example due to an anchoring-and-adjustment heuristic, their forecasts and the resulting ICCs may tend to exhibit persistent (but time-varying) errors. Another possibility is that persistent model misspecification errors gives rise to persistent and time-varying measurement errors.…”

Section: Modelmentioning

confidence: 99%

Measurement Errors of Expected Returns Proxies and the Implied Cost of Capital

Wang

2012

SSRN Journal

View full text Add to dashboard Cite

This paper presents a methodology to study implied cost of capital's (ICC) measurement errors, which are relatively unstudied empirically despite ICCs' popularity as proxies of expected returns. By applying it to the popular implementation of ICCs of Gebhardt, Lee, and Swaminathan (2001) (GLS), I show that the methodology is useful for explaining the variation in GLS measurement errors. I document the first direct empirical evidence that ICC measurement errors can be persistent, can be associated with firms' risk or growth characteristics, and thus confound regression inferences on expected returns. I also show that GLS measurement errors and the spurious correlations they produce are driven not only by analysts' systematic forecast errors but also by functional form assumptions. This finding suggests that correcting for the former alone is unlikely to fully resolve these measurement-error issues. To make robust inferences on expected returns, ICC regressions should be complemented by realized-returns regressions.

show abstract

Section: Modelmentioning

confidence: 99%

Measurement Errors of Expected Returns Proxies and the Implied Cost of Capital

Wang

2012

SSRN Journal

View full text Add to dashboard Cite

show abstract

“…We expect these implications to apply to a wider range of settings, given that variables of interest are commonly related to a firm's information environment. Moreover, the relation between forecast uncertainty and the sign of earnings surprises is likely to be important for studies that rely on signed earnings surprises in other contexts, such as when modeling predictable variation in analysts' forecast errors (e.g., Hughes et al 2008;Mohanram and Gode 2013;So 2013).…”

Section: Introductionmentioning

confidence: 99%

Analyst information precision and small earnings surprises

Bissessur

Veenman

2016

Rev Account Stud

View full text Add to dashboard Cite

This study proposes and tests an alternative to the extant earnings management explanation for zero and small positive earnings surprises (i.e., analyst forecast errors). We argue that analysts' ability to strategically induce slight pessimism in earnings forecasts varies with the precision of their information. Accordingly, we predict that the probability that a firm reports a small positive instead of a small negative earnings surprise is negatively related to earnings forecast uncertainty, and we present evidence consistent with this prediction. Our findings have important implications for the earnings management interpretation of the asymmetry around zero in the frequency distribution of earnings surprises. We demonstrate how empirically controlling for earnings forecast uncertainty can materially change inferences in studies that employ the incidence of zero and small positive earnings surprises to categorize firms as suspected of managing earnings.

show abstract

“…On the other hand, So (2013) highlights an important methodological limitation in the way Hughes et al (2008) and other related studies calculate the predicted component of analyst errors. More broadly, studies in the "anomalies" literature suggest that investors naively fixate on analysts' forecasts (Abarbanell and Bernard (1992), Dechow and Sloan (1997), Bradshaw, Richardson and Sloan (2001)).…”

Section: Do Investors Unravel Predictable Biases In Analysts' Forecasts?mentioning

confidence: 97%

“…Similarly, to the extent that market participants anticipate variation in forecast bias, researchers can improve estimates of earnings expectations by estimating the component of forecast bias that is unanticipated by market participants. On the other hand, to the extent that these weights are imperfect, understanding the predictive component of analysts' errors could also yield predictable patterns in stock returns (assuming that the expectation errors will eventually be corrected in the future) (see Elgers et al, 2003;Bradshaw et al, 2001;Frankel and Lee, 1998;and So, 2013). …”

Section: Properties Of Analysts' Forecastsmentioning

confidence: 99%

Analysts’ Forecasts and Asset Pricing: A Survey

Kothari

Verdi

2016

Annu. Rev. Financ. Econ.

193

View full text Add to dashboard Cite

This survey reviews the literature on sell-side analysts' forecasts and its implications for asset pricing. We review the literature on the supply and demand forces shaping analysts' forecasting decisions as well as the implications of the information they produce for both the cash flow and the discount rate components of security returns. Analysts' forecasts bring prices in line with the expectations they embody, consistent with the notion that analysts' forecast contain information about future cash flows. However, analysts' forecasts exhibit predictable biases and the market appears to underreact to the information in forecasts and not fully filter the biases in the forecasts. Analyst forecasts are also helpful in estimating expected returns on securities, but evidence on the relation between analysts' forecasts and expected returns is still scarce. We conclude by identifying unanswered questions and offering suggestions for future research.

show abstract

A New Approach to Predicting Analyst Forecast Errors: Do Investors Overweight Analyst Forecasts?

Cited by 134 publications

References 71 publications

Measurement Errors of Expected Returns Proxies and the Implied Cost of Capital

Measurement Errors of Expected Returns Proxies and the Implied Cost of Capital

Analyst information precision and small earnings surprises

Analysts’ Forecasts and Asset Pricing: A Survey

Contact Info

Product

Resources

About