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How Informative Are Earnings Forecasts?

Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam, P.O. Box 1738, NL-3000 DR Rotterdam, The Netherlands
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J. Risk Financial Manag. 2018, 11(3), 36; https://doi.org/10.3390/jrfm11030036
Received: 28 May 2018 / Revised: 22 June 2018 / Accepted: 26 June 2018 / Published: 1 July 2018
(This article belongs to the Special Issue Applied Econometrics)
We constructed forecasts of earnings forecasts using data on 406 firms and forecasts made by 5419 individuals with on average 25 forecasts per individual. We verified previously found predictors, which are the average of the most recent available forecast for each forecaster and the difference between the average and the forecast that this forecaster previously made. We extended the knowledge base by analyzing the unpredictable component of the earnings forecast. We found that for some forecasters the unpredictable component can be used to improve upon the predictable forecast, but we also found that this property is not persistent over time. Hence, a user of the forecasts cannot trust that the forecaster will remain to be of forecasting value. We found that, in general, the larger is the unpredictable component, the larger is the forecast error, while small unpredictable components can lead to gains in forecast accuracy. Based on our results, we formulate the following practical guidelines for investors: (i) for earnings analysts themselves, it seems to be the safest to not make large adjustments to the predictable forecast, unless one is very confident about the additional information; and (ii) for users of earnings forecasts, it seems best to only use those forecasts that do not differ much from their predicted values. View Full-Text
Keywords: earnings forecasts; earnings announcements; financial markets; financial analysts earnings forecasts; earnings announcements; financial markets; financial analysts
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De Bruijn, B.; Franses, P.H. How Informative Are Earnings Forecasts? . J. Risk Financial Manag. 2018, 11, 36.

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