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Financial analysts' forecasts of earnings: A better surrogate for market expectations
Abstract
The specification of the market expectation of accounting numbers is a common feature of many empirical studies in accounting and finance. Givoly and Lakonishok (1979) found that financial analysts' forecasts have information content. This study evaluates the quality of analysts' forecasts as surrogates for the market expectation of earnings and compares it with that of prediction models commonly used in research. Results indicate that prediction errors of analysts are more closely associated with security price movements, suggesting that analysts' forecasts provide a better surrogate for market expectations than forecasts generated by time-series models. The study also identifies factors that might contribute to the performance of the financial analysts'forecasts. The broadness of the information set employed by analysts and, to a lesser extent, their reliance on information released after the end of the fiscal year appear to be important contributors to their performance.
... Further, we show that the portfolio holdings of fundamental indices underweight 4 A substantial body of literature supports the idea that long-range analyst forecasts are biased and inefficient (see, e.g. Fried and Givoly 1982;Butler and Lange 1991;Brous 1992;Brous and Kini 1993;Francis and Philbrick 1993;Kang et al. 1994;Dreman and Berry 1995;Easterwood and Nutt 1999;Abarbanell and Lehavy 2003;Richardson et al. 2004;Agrawal and Chen 2012;Bradshaw et al. 2006). However, whether investors fail to recognize analyst bias remains a contested debate (e.g. ...
... We assume these analyst forecast errors are representative of equity mispricing by all investors (Assumption 1). The notion that analyst forecasts are representative of market expectations (Elton et al. 1981;Fried and Givoly 1982;Vander Weide and Carleton 1988) and that analysts make systematic errors when forecasting stocks' LTG (Dechow and Sloan 1997;La Porta et al. 1997;Lakonsihok et al. 1994;Doukas et al 2002) is consistent with the literature. ...
... Following existing studies, we assume that the views of analysts are representative of the views of market participants (Elton et al. 1981;Fried and Givoly 1982;Vander Weide and Carleton 1988). Therefore, LTG forecasts are expected to influence the present valuation of each stock. ...
Evidence from many developed markets suggests that fundamental indices outperform capitalisation-weighted indices. Existing studies suspect a story of market mispricing, yet a mechanism has not been identified. Using Australian data, we study the relation between analyst forecast errors and the performance of various fundamental indices. We find that fundamental indices contain a relatively higher exposure to stocks with low analyst long-term growth forecasts. Valuations for these stocks are ex ante overly pessimistic and drive the statistical significance of alphas produced by fundamental indexation. We show how hedging against analyst forecast errors can generate additional alpha for investors using fundamental indexation.
... The classical decomposition (Campbell and Shiller, 1988) shows that stock returns are driven by changes in per-share earnings expectations and/or discount rates. A traditional approach to project the market's expectations about a firm's prospects is to use revisions in analysts' earnings forecasts as its proxy (Fried and Givoly, 1982;Brown and Rozeff, 1978). 31 The IBES Detail History database (stock-split-adjusted) provided our financial analyst forecasts. ...
... Analysts are very influential agents in financial markets. Studying their earnings forecasts can provide valuable information about changes in market's expectations on the future prospects of individual firms, and can help researchers better understanding drivers of price changes (see, e.g., Fried andGivoly, 1982, andBrown andRozeff, 1978). In this section, we test whether in the weeks following the first Global Climate Strike financial analysts revised downward their expectations on the future operating performance of high carbon intensive firms. ...
... Analysts are very influential agents in financial markets. Studying their earnings forecasts can provide valuable information about changes in market's expectations on the future prospects of individual firms, and can help researchers better understanding drivers of price changes (see, e.g., Fried andGivoly, 1982, andBrown andRozeff, 1978). In this section, we test whether in the weeks following the first Global Climate Strike financial analysts revised downward their expectations on the future operating performance of high carbon intensive firms. ...
... The regression results are shown in Table 4. When employing CAR as the dependent variable, the regression coefficients for ERROR1, ERROR2 and FOM all exhibit significantly positive, these findings are consistent with Fried and Givoly [31], ERROR is a suitable proxy for earnings surprises, but the significance of the coefficient for FOM is 14.28, which is higher than the t-value of the ERROR1 (4.00) and the t-value of the ERROR2 (3.09). However, after controlling for the three earnings surprises measures, only the coefficient of FOM remains significantly positive in relation to CAR. ...
We investigate the robustness of earnings surprise measures in the context of a revised market reaction. While existing literature suggests that financial anomalies may distort cumulative abnormal returns (CAR) during annual announcements, our research proves that a revised market reaction offers a more accurate reflection of investor reactions to earnings correction. Specifically, we introduce an innovative adjustment to CAR using stock price jumps, and prove that the fraction of misses on the same side (FOM) provides a superior measure of earnings surprises. Furthermore, we find that investor trading patterns align with FOM, and the post-earnings announcement drift (PEAD) strategy based on FOM outperforms that based on analysts’ forecast error.
... Financial performance is also the concept and narrow definition of the performance of organizations and companies, as it depends on the use of financial measures and ratios in order to measure the duration of achieving goals, and it is one of the main pillars of many different work carried out by institutions. Financial performance plays an important role in providing organizations and companies with investment opportunities in all different fields of performance that help meet interests (Fried et al., 1982). ...
... Third, we require measures of the market's expectations of non-GAAP earnings and exclusions. Researchers have long used analysts' forecasts to capture the market's expectation of earnings (Fried and Givoly 1982), which highlights the importance of analysts as an important information intermediary for investors. Given our use of analyst-provided non-GAAP earnings information, we proxy for ExpectedNonGAAPEPS with the most recent analyst EPS consensus forecast prior to the earnings announcement date. ...
Although the increase in non-GAAP earnings metrics has drawn unfavorable attention from regulators and standard setters, it can provide valuable experience for investors. We investigate whether experience with non-GAAP earnings metrics influences investors’ pricing of non-GAAP exclusions. We measure experience as the frequency with which managers or analysts provide non-GAAP earnings over the prior eight quarters and find that experience aids in the pricing of non-GAAP exclusions. Absent prior experience with non-GAAP earnings metrics, investors appear to overestimate the persistence of exclusions at the earnings announcement, which corrects in the following months. Cross-sectional tests suggest that experience facilitates investors’ pricing of non-GAAP exclusions by reducing their information processing costs.
JEL Classifications: M40.
... The body of published research on analysts' earnings forecasts is extensive. A dominant theme emerging from this literature is that because reported earnings, on average, fail to meet analysts' forecasts, researchers typically conclude that analysts issue optimistic earnings forecasts (e.g., Abarbanell & Lehavy, 2003b;Agrawal & Chen, 2006;Bradshaw et al., 2006;Brous, 1992;Brous & Kini, 1993;Butler & Lange, 1991;Dreman & Berry, 1995a;Easterwood & Nutt, 1999;Francis & Philbrick, 1993;Fried & Givoly, 1982;Kang et al., 1994;and O'Brien, 1988). This conclusion, however, is confounded by the fact that the frequency with which reported earnings meet or beat forecasts typically exceeds the frequency with which they fail to meet forecasts. ...
A study of Value Line quarterly earnings forecast errors from 1999 through Q3 2016 shows that the direction of forecast bias and forecast efficiency with respect to earnings news depend on investment rating. Patterns of bias and inefficiency indicate that Value Line analysts are primarily motivated to maintain credibility with investors than to appease company managers. For Buy-rated stocks, forecast bias is pessimistic, and forecasts are inefficient with respect to good earnings news. When news is bad for Buy-rated stocks, forecasts are unbiased and efficient. For Sell-rated stocks, forecast bias is optimistic, and forecasts are inefficient with respect to bad earnings news. When news is good for Sell-rated stocks, forecasts are unbiased and efficient.
... However, as found by Elton et al. (1981), stock prices respond more to changes in analyst forecasts of earnings than they do to changes in earnings themselves. As a result, it has become standard in the industry to use the consensus analyst earnings forecasts to poxy the unobservable market expectations for firm earnings (Fried and Givoly, 1982). expectations and investing in these stocks, especially in bullish markets. ...
Green finance is one of the core measures to achieve low-carbon and sustainable development. However, the rapid development leaves some research gaps. In this study, we aim to fill one of these gaps by systematically examining investors’ earnings expectations of conventional and renewable energy firms from 1992 to 2016, when climate change is gradually recognized as one of the biggest challenges facing humanity in the 21st century. We find market participants are overly optimistic about the future earnings of conventional and renewable energy firms. However, the earnings optimism about these two types of firms is less strong than the benchmark market portfolio. Besides, conventional and renewable energy stocks exhibit time-varying earnings optimism. Surprisingly, no significant difference in earnings expectations between conventional and renewable energy stocks is identified. Regression results indicate a positive relation between firm investment (profitability) and earnings optimism of renewable (conventional) energy firms. These observations imply that investors are more future-oriented when they estimate earnings of renewable energy firms, while they focus on current profitability when they face conventional energy firms. The results of this study have implications in understanding the effect of social factor on investors and solving the return puzzle of conventional and renewable energy stocks.
... Contemporary research argues that analysts' forecasts can be employed as a measure of performance of a firm. For example, Fried and Givoly (1982) provide evidence that analysts' forecasts are better than those of time-series models when used as proxy for market expectations. Brown et al. (1985) show that share price of a firm is driven by analysts' expectations of its future earnings. ...
Our study examines Economic Value Added metric’s link to long term shareholder value creation. We assume that EVA adoption directs a positive change in managerial behavior that in turn affects long-term value generation. Unlike most prior research that uses only one sample, we employ two samples. The first sample is based on 57 U.S. firms that Stern Stewart & Company has posted on its website. They report that these firms have achieved superior financialperformance as a consequence of the adoption of EVA for the 1994-98 periods. The second sample is based on 178 U.S. firms’ proxy statements for the 1994-1999 periods in which these firms have described EVA use as a part of their performance evaluation and compensation metric. Our study’s results, using both long-term abnormal holding period returns and analyst forecast based on five-year growth of earnings per share show that EVA adoption has no significant impact on a firm’s long-run performance when compared to a control sample matched on industry, size and past performance. Moreover, we find no evidence that EVA adoption induces greater shortsightedness as EVA adopters do not underperform, on average, the non-EVA firms.
... Analyst reports provide valuable information to market participants, help investors form earnings expectations, and are the basis for analyst recommendations (Fried and Givoly 1982;Grossman and Stiglitz 1980;Loh and Stulz 2011;Park and Stice 2000;Schipper 1991;Womack 1996). Two factors likely have the greatest impact on an analyst's work: the quality of the information she uses as input in her forecasting model and the information environment in which the firm operates. ...
This paper studies the impact of local religiosity on analyst forecast accuracy. Using the level of religious adherence as a proxy for religiosity in firm headquarter states, we find that analyst forecasts are more accurate for firms located in areas with stronger religious social norms. Our finding is robust to the inclusion of analyst and regional characteristics, firm, industry, and state fixed effects, controlling for earnings quality and audit quality, 2SLS-instrumental variable estimation, propensity score matching analysis, and a difference-in-difference test using firm headquarter relocations as a quasi-natural experiment. We further document a novel finding that religiosity has an “accentuating effect” on analyst forecast accuracy: religion can make a good thing better. Specifically, we find that local religiosity has a more pronounced positive effect on firms issuing management guidance, firms with better internal governance, better external monitoring, and having fewer agency problems. We also find the positive religiosity-forecast accuracy relation to be more pronounced for managers with greater tournament incentives and for analysts with more years of experience covering a specific firm. Finally, we find that analyst forecast revisions for firms in more religious areas have higher information content. Overall, our study shows that religiosity enhances the accuracy and information content of analyst forecasts.
... 여기에서 은 Fama-French 3요인모형 (Fama and French, 1993) (Fried and Givoly, 1982;Brown et al., 1987;Abarbanell and Bernard, 1992;Liang, 2003 ...
This study analyzes the impact of investors’ attention, market sentiment, and company characteristics on stock price responses to earnings announcements, using Korean stock market data from 2003 to 2019. First, we find that stock prices respond in the same direction as unexpected earnings, and the significance of stock price response decreases as time passes in the post-event period. Specifically, value stocks respond quickly and appropriately during an event period. The prices of growth stocks tend to overreact to good news during the event period, then show a reversal effect in the post-event period, underreact to bad news during the event period and then adjust through post-earnings announcement drift(PEAD). Second, we find that the stock prices of large and small/medium-sized companies with higher investor attention respond quickly during the event period, and those of small/medium-sized companies with lower investor attention take time to respond. Third, we found that market sentiment does not significantly impact the stock price responses during the event period but positively impacts small/medium-sized companies and growth stock in the post-event and long-term(event period and post-event period combined) periods.
... Pengumuman laba kuartalan sebagai variabel independen diukur dengan menggunakan unexpected earning (UE) sebagai proksi untuk informasi laba. Untuk menghitung UE penelitian ini menggunakan model random walk (Fried and Givoly, 1982;Bamber, 1986Bamber, , 1987) UE random walk model atau UET (the "time series"matric) didefenisikan sebagai nilai absolut dari perbedaan antara EPS pada kuartal tahun ini dengan EPS dari kuartal yang sama pada tahun sebelumnya dan dibagi dengan harga saham pada saat tanggal pengumuman laba. Model random walk mengasumsikan bahwa ekspektasi investor untuk laba kuartal ini diharapkan sama dengan kuartal yang sama tahun sebelumnya. ...
This research aims to examine and prove empirically the effect of the announcement of quarterly earnings information during the Covid-19 pandemic on investor responses by using event studies. The dependent variable in this study is the investor's response as measured by cumulative abnormal return (CAR). The observation window used in this study was 7 days, namely three days before the announcement and three days after the announcement. The independent variable is the announcement of quarterly earnings as measured by unexpected earnings (EU). This study also examines the effect of changes in quarterly income, type of industry, and growth in Covid-19 cases as control variables on investor response. The sample in this study was 2,212 which were determined using the purposive sampling method. The results of the study prove that the announcement of quarterly earnings has a statistically significant effect on investor responses in several windows, changes in revenue have no effect on investor responses for all windows used, only in the windows t0;t2 CAR for financial and non-financial companies is different and significant. statistically, and the growth of covid cases was influential and statistically significant for several windows.
... Prior research shows that the analysts' recommendations significantly affect stock prices (Givoly and Lakonishok, 1979;Lys and Sohn, 1990;Francis and Soffer, 1997). Financial analysts play an important role in increasing the efficiency of capital market and their earnings forecasts are more precise than time-series models of earnings, because they can incorporate firm and economy news more timely than time-series models (Brown and Rozeff, 1978;Brown et al., 1987;Fried and Givoly, 1982). As regards the earnings conference call, Matsumoto et al. (2011) document that the Q&A session in an earnings conference call is relatively more informative than the presentation session and that this superior information content is positively associated with analysts' following. ...
Purpose
This paper aims to examine whether firms meeting or just beating an earnings benchmark engage in tone management in earnings conference calls to complement earnings management in the UK context. It also investigates whether the audience tone in beating or just meeting earnings fails to predict future performance.
Design/methodology/approach
This study was performed using a sample of non-financial UK firms listed in the FTSE 350 index over the period 2010–2015.
Findings
The findings show that firms that exercise more earnings management to meet or just beat earnings are positively associated with the abnormal tone during earnings conference calls. The outcomes also reveal that the audience’s tone of firms meeting or just beating an earnings benchmark fails to predict future performance. This confirms the effectiveness of the tone management in managing the perception of audience.
Practical implications
This study highlights the need for increased accountability by firms on earnings conference call. It also supports academics and practitioners in understanding the management discretion used in reporting and communication during the earnings conference call. Overall, the results of this study are beneficial for regulators, policymakers and professionals, regarding confirming the need for the earnings conference calls to be regulated.
Originality/value
To the best of the authors’ knowledge, this is the first study that examines the association between earnings management and tone management in the UK earnings conference calls. It adds to the existing literature by examining the self-serving behaviour of managerial tone during earnings conference calls within a sitting in which meeting or just beating a benchmark is used. Unlike several studies that explain the behaviour of tone as a signalling strategy, this study reveals that the tendency of impression management behaviour can explain the tone management.
... We expect that the relationship between news and stock price reactions will be moderated by the consensus ESG rating. From prior literature examining financial analyst forecast and bond ratings, we know that forecasts shape market expectations, but also that some changes in forecast would already be anticipated and "priced in" by the market (Fried and Givoly 1982;Goh and Ederington 1993). Similarly, our hypothesis is that ESG ratings might shape market expectations about future ESG news and thereby have an effect on the associated market reactions. ...
We investigate whether environmental, social, and governance (ESG) ratings predict future ESG news and the associated market reactions. We find that the consensus rating predicts future news, but its predictive ability diminishes for firms with large disagreement between raters. The relation between news and market reaction is moderated by the consensus rating. In the presence of high disagreement between raters, the relation between news and market reactions weakens, while the rating with the most predictive power predicts future stock returns. Overall, while rating disagreement hinders the incorporation of value-relevant ESG news into prices, ratings predict future news and proxy for market expectations of future news.
... Looking into existing solutions, two main groups of earnings predictions sources arise: time series models (TS) and sales analysts' (SA) estimates. These two groups closely go into a debate of which one is superior with certain studies showing that SA significantly outperform TS models forecasts (Brown and Rozeff 1978, Collins and Hopwood 1980, Fried and Givoly 1982, Wiedman 1996 while others state that SA estimates are not significantly more accurate than TS models (Cragg and Malkiel 1968, Elton and Gruber 1972, Imhoff and Pare 1982. ...
In this paper we develop a generalized deep neural network model to predict
quarterly earnings. Using a diverse range of predictors consisting of fundamental, technical
and sentiment data the resulting model outperforms existing timeseries models such as the
Fama-French 2006 regression model and comes close in prediction accuracy to sales analysts’
estimates. This is achieved by handling some known issues in time series models such as
seasonality and non-linearity of the earnings while improving predictions with additional
explanatory variables that reflect the expectations of the market. Thus, we add to the existing
literature a comprehensive and innovative neural network model that provides solutions to
known challenges in forecasting and closes the gap between statistical models and sales
analysts.
... Dans certaines recherches relatives à l'importance des analystes financiers sur le marché financier, en rapport avec la théorie de l'agence, il est à souligner le rôle informationnel de ces derniers dans l'analyse et la diffusion d'informations prévisionnelles sur la situation des entreprises. Plusieurs études empiriques confirment l'influence de leurs prévisions sur les marchés financiers mais aussi la pertinence et l'utilité de leurs diagnostics pour les investisseurs (Elton, Gruber et Gultekin, 1981 ;Fried et Givoly, 1982 ;Givoly et Lakonishok, 1984). ...
Cette thèse propose d’étudier l’impact des immatériels sur les performances des entreprises à travers l’influence de la RSE sur les composants du capital immatériel et les performances associées. Dans un premier temps, une étude exploratoire de l’univers des entreprises marchandes et non marchandes éclaire le rôle des parties prenantes et les spécificités liées au modèle économique, plus particulièrement en ce qui concerne la responsabilité sociale des entreprises et leur utilité sociale. Une revue de la littérature axée sur les concepts du capital immatériel et de RSE précise les insuffisances du cadre comptable et met en évidence les enjeux liés à la communication extra-financière relative aux immatériels et aux pratiques sociales et environnementales des entreprises. Puis, une revue du cadre théorique sur les développements des approches de la performance globale et de la RSE met en exergue les insuffisances des indicateurs financiers traditionnels pour évaluer la performance de l’entreprise et souligne le rôle déterminant de la RSE dans la relation entre le capital immatériel et la performance. Ensuite, l’examen de la perception de la performance et du capital immatériel par les acteurs du monde de l’entreprise et de l’économie (à savoir des dirigeants, des analystes financiers, des académiques et militants syndicaux) et l’analyse statistique du discours relatif aux pratiques sociales et environnementales des entreprises montrent comment les informations relatives à ces pratiques de RSE dans les entreprises sont susceptibles de contribuer à la définition des composants immatériels et à la mesure des performances associées. Pour finir, l’analyse de sensibilité du modèle de performance, basé sur un modèle de cash-flow de type Discounted Cash-Flow, révèle comment les analystes financiers sont amenés à intégrer les actifs immatériels dans la définition du capital immatériel des mutuelles et des entreprises innovantes du CAC 40 d’une part, ainsi que les informations sociales et environnementales dans la mesure des composants immatériels et des performances associées d’autre part
... Early studies on the properties of earnings relied on time-series models to predict earnings (e.g., Ball and Watts 1972). As analyst forecasts became more widespread, studies documented that analysts provide more accurate forecasts than time-series models and their forecasts generate larger earnings response coefficients, suggesting they better proxy for market expectations, due to both a timing and information advantage (Collins and Hopwood 1980;Fried and Givoly 1982;Brown et al. 1987;Stickel 1990;Schipper 1991). While this evidence fueled the use of analyst forecasts as proxies for market expectations, subsequent studies have documented a range of predictable errors related to publicly available information (e.g., DeBondt and Thaler 1990;Lys and Sohn 1990;Abarbanell 1991;Mendenhall 1991;Abarbanell and Bernard 1992;Easterwood and Nutt 1999;So 2013). ...
We show analysts’ own earnings forecasts predict error in their own forecasts of earnings at other horizons, which we argue provides a measure of the extent to which analysts inefficiently use information. We construct our measure by exploiting two sources of variation in analysts’ incentives: (i) more recent forecasts have greater salience at the time of the earnings release so accuracy incentives are higher (lower) at shorter (longer) forecast horizons and (ii) analysts have greater incentives for optimism (pessimism) at longer (shorter) horizons. Consistent with these incentives affecting the incorporation of information into forecasts, we document (i) current year forecasts underweight (overweight) information in shorter (longer) horizon forecasts and (ii) the mis-weighting is more pronounced when recent news is negative—when analysts have greater (weaker) incentives to incorporate the news into shorter (longer) horizon forecasts. Finally, returns tests suggest that forecasts adjusted for the inefficiency we document better represent market expectations of earnings.
Purpose
Analyst team forecasts are the most frequent form of earnings expectations available to investors, with teams issuing more than 70% of research reports in 2016. Prior research provides differing evidence on whether analyst teams issue higher or lower quality forecasts than individual analysts.
Design/methodology/approach
I use a sample of more than 17,000 hand-collected analyst reports representing 7,586 forecasts from 89 companies in three industries from 1994–2005.
Findings
I document that analyst teams benefit from an assembly bonus, and issue more accurate forecasts than individual analysts only in time periods when teams would be expected to benefit from an assembly bonus.
Practical implications
I outline multiple factors within the control of brokerage houses that impact teams’ relative forecast quality, such as the number of members in the team, how long the team has worked as a unit and the costliness of integrating information when forming a forecast.
Originality/value
Given the preponderance of analyst teams and the strength of market reaction to their forecasts, it is valuable to document factors both in the past and present likely to affect analyst teams’ relative forecast accuracy.
Equity method investments are commonly a material component of a firm's corporate structure, yet these investments are presented to financial statement users through opaque financial reporting. This study demonstrates that the link between equity method earnings and future earnings is stronger than the link between consolidated earnings and future earnings, consistent with the synergistic and diversification benefits of equity method investments. Next, this study demonstrates a limitation in the opaque reporting of equity method investments by revealing that the market fails to fully incorporate into prices the link between equity method earnings and future earnings. Further, this study contributes to the active debate among practitioners and regulators about the usefulness of supplemental disclosure requirements related to equity method investments. Results indicate that supplemental equity method investment disclosures aid the market in impounding the persistence of equity method earnings into share price.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
Psychologists have been observing and interpreting economic behaviour for at least fifty years, and the last decade, in particular, has seen an escalated interest in the interface between psychology and economics. The Cambridge Handbook of Psychology and Economic Behaviour is a valuable reference resource dedicated to improving our understanding of the economic mind and economic behaviour. Employing empirical methods – including laboratory experiments, field experiments, observations, questionnaires and interviews – the Handbook covers aspects of theory and method, financial and consumer behaviour, the environment and biological perspectives. With contributions from distinguished scholars from a variety of countries and backgrounds, the Handbook is an important step forward in the improvement of communications between the disciplines of psychology and economics. It will appeal to academic researchers and graduates in economic psychology and behavioural economics.
This chapter discusses the rational investor, behavioral finance, neurofinance, consensus opinions, and their impacts on stock and other markets. The chapter begins with a discussion of rational investor paradigms, describing the St. Petersburg Paradox and von Neuman-Morgenstern axioms of choice. Essential findings of Prospect Theory are described, including the framing and anchoring problems, myopia, overreaction, overconfidence, and other fundamental problems in pursuing sound rational solutions to investing, and trading problems. Connections between all of these barriers to rational decision-making to finance are explored. Psychological and physiological underpinnings to such problems are offered. Relationships between irrational investors and markets, either efficient or inefficient are discussed. In this discussion, game shows, betting markets, analyst estimates, and consensus forecasts are offered as evidence that cognitively impaired investors can comprise rational markets, while information cascades and herding can lead to irrational markets.
We document findings that earning extrapolation based on seasonal random trend (SRT) model is not inferior to analysts’ quarterly earnings forecasts, which contradicts the belief that analysts are superior to time‐series models. Our findings suggest that while the frequency of analysts beating SRT extrapolations is greater than 50%, the marginal accuracy improvement is weak. Analysts’ forecasts contain larger absolute forecast error and significant pessimistic bias than SRT extrapolation. Prior studies attribute the superiority of analysts’ forecasts in proxying for earnings expectation to its higher accuracy. Given that the SRT extrapolations have lower average forecast error, we explore whether market participants use them to develop earnings expectations. Our findings indicate that the market anchors to analysts’ forecasts and treats SRT extrapolations as supplemental.
This study examines the usefulness of analysts’ book value forecasts and the economic factors driving analysts’ issuance of these forecasts. Guided by the real‐options‐based valuation model (ROM) of Zhang (2000), we explicitly link book value forecasts to the need for such information in valuation. We first establish that analysts’ book value forecasts are superior to forecasts that are mechanically imputed from analysts’ own earnings forecasts and those from random walk models and are incrementally informative beyond analysts’ earnings, cash flow, and dividend forecasts. We then employ the ROM to explore the distinct information embedded in book value forecasts and analysts’ decisions to issue these forecasts. Consistent with our expectations, we find that (i) book value forecasts convey growth information that is significantly correlated with ex ante indicators of real options, while analysts’ earnings forecasts do not display this property and (ii) analysts issue more book value forecasts when either growth options or, to a lesser extent, abandonment options are an important part of firm value. Our study sheds light on how analysts’ book value forecasts are useful and under what circumstances analysts provide such information to meet investors’ needs. This article is protected by copyright. All rights reserved.
This study examines the usefulness of analysts’ book value forecasts and the economic factors driving analysts’ issuance of these forecasts. We first establish that analysts’ book value forecasts are superior to forecasts that are mechanically imputed from analysts’ own earnings forecasts and those from random walk models and are incrementally informative beyond analysts’ earnings, cash flow, and dividend forecasts. We then employ real-options-based valuation theory (Zhang 2000) to explore the distinct information embedded in book value forecasts and analysts’ decisions to issue these forecasts. Consistent with our expectations, we find that (i) book value forecasts convey growth information that is significantly correlated with ex ante indicators of real options, while analysts’ earnings forecasts do not display this property; and that (ii) analysts issue more book value forecasts when either growth options or, to a lesser extent, abandonment options are an important part of firm value. Our study sheds light on how analysts’ book value forecasts are useful and under what circumstances analysts provide such information to meet investors’ needs.
This research provides novel insights into the marketing–finance literature by shedding new light on the association between the temporal variation of prelaunch expectations of a new product’s market performance and postlaunch firm value. We establish the nature of this relationship from theoretical underpinnings of psychological tendencies such as reference dependence and recency effect. Drawing from the emerging literature on crowdsourced earnings forecasts, we use crowdsourced expectations provided by a prediction market as a proxy for the market’s expectations. The results show that two varying patterns of expectations play a critical role in driving postlaunch firm value. Specifically, the last‐moment variation of prelaunch expectations (i.e., last‐moment increase or decrease) is negatively related to firms’ postlaunch stock price response, while the overall expectation level (i.e., high vs. low mean level) moderates the negative relationship between the last‐moment variation of expectations and firm value.
Previous research indicates that analysts’ forecasts are superior to time series models as measures of investors’ earnings expectations. Nevertheless, research also documents predictable patterns in analysts’ forecasts and forecast errors. If investors are aware of these patterns, analysts’ forecast revisions measured using the random walk expectation are an incomplete representation of changes in investors’ earnings expectations. Investors can use knowledge of errors and biases in forecasts to improve upon the simple random walk expectation by incorporating conditioning information. Using data from 2005 to 2015, we compare associations between market-adjusted stock returns and alternative specifications of forecast revisions to determine which best represents changes in investors’ earnings expectations. We find forecast revisions measured using a ‘bandwagon expectations’ specification, which includes two prior analysts’ forecast signals and provides the most improvement over random-walk-based revision measures. Our findings demonstrate benefits to considering information beyond the previously issued analyst forecast when representing investors’ expectations of analysts’ forecasts.
Compared with western developed countries, the maturity and effectiveness of China’s securities market are relatively low, and investors are more likely to be swayed by analysts’ opinions. Efficiency is an important indicator to measure the competitiveness of listed companies, analysts’ earnings pressure can not only make management inclined to short-term investment behaviour, but also affect stakeholders’ views on the company, which is not conducive to the company’s efficiency and long-term development. Therefore, this study examines the impact of external profit pressure on the operating efficiency of Chinese listed companies and its internal mechanism. The technical efficiency (TE), pure technical efficiency (PTE) and scale efficiency (SE) of the samples of listed companies are calculated by data envelopment method (DEA), it is found that external profit pressure has a negative impact on TE and PTE but a positive impact on SE. The institutional investor plays an intermediary role between external profit pressure and operating efficiency, and corporate social responsibility regulates the relationship between external profit pressure and institutional investors’ shareholding. The conclusion of the research has important theoretical value and practical significance in clarifying the relationship between external profit pressure and the operating efficiency.
This paper provides an adaptive model depicting the interaction between the disclosure of interim earnings and the accuracy of earnings forecasts that are made public by security analysts. Our results indicate that accuracy of annual earnings forecasts is highly correlated with the announcement of interim earnings, suggesting that security analysts use the signals provided by the disclosure of interim reports. Though intuitively appealing, these results are inconsistent with some of the earlier research findings concerning the predictive power of quarterly earnings. They also provide a good explanation for the reasonably high rate of accuracy of analysts' annual earnings forecasts.
The process by which analysts revise quarterly earnings forecasts is analyzed and compared to the way in which several time-series models of quarterly earnings revise forecasts. A significant portion of the analyst's forecast revision is explained by the most recent one-quarter-ahead forecast error. Analyst revisions are adaptive in the same manner that single-period ahead model forecasts are adaptive. At longer horizons, the evidence is that analysts revise forecasts in the same way that autoregressive models of quarterly earnings revise and not as moving average models do.
Numerous studies observe abnormal returns after the announcement of quarterly earnings. Ball (1978) suggests those returns are not evidence of market inefficiency, but instead are due to deficiencies in the capital asset-pricing model. This paper tests whether abnormal returns are observed when steps are taken to reduce the effect of deficiencies in the capital asset-pricing model. Significant abnormal returns are observed, but do not cover the transactions costs unless one can avoid direct transactions costs (e.g., a broker). The paper also investigates whether those abnormal returns can be attributed to a deficiency in the capital asset-pricing model. The conclusion is they cannot.
This study tests the efficiency of the securities market with respect to non-public segment earnings data for 1967–1969 which was first made public by many firms in 1970 SEC 10-K reports. Trading rule strategies are proposed in which segment-based earnings forecasts are compared to consolidated-based forecasts to anticipate ‘unexpected’ changes in earnings. Using the ‘market model’ to eliminate market related movements in security prices, average monthly abnormal returns conditional on this segment-based strategy are estimated for 1968, 1969, and 1970 for two groups of firms: (1) ‘Non-disclosure’ firms that did not publicly report either segment revenue or profit data prior to 1970, and (2) ‘partial disclosure’ firms that publicly reported segment revenue information, but no segment profits, prior to 1970.The results suggest that the market was not efficient with respect to the non-public segment revenue and profit data of non-disclosure firms for 1968–1969. However, this finding could not be replicated for 1970. The average monthly abnormal returns conditional on the segment-based trading rule strategy were found to be relatively small for the partial disclosure firms. This suggests that segment revenue data can be used to successfully anticipate changes in total entity earnings which would otherwise be ‘unexpected’ if only consolidated data were available.
Photocopy. Thesis (Ph. D.)--University of Chicago, 1979. Bibliography: leaves 91-94.
The paper assesses the information content of revisions in financial analysts' forecasts of earnings by analyzing the relation between the direction of these revisions and stock price behavior. Abnormal returns during the months surrounding the revisions in analysts' forecasts are computed and evaluated. The results strongly indicate that information on revisions in forecasts of earnings per share is valuable to investors. It is also suggested that market reaction to the disclosure of analysts' forecasts is relatively slow and gives rise to potential abnormal returns to investors who act upon this type of publicly available information.
This study documents empirical anomalies which suggest that either the simple one-period capital asset pricing model (CAPM) is misspecified or that capital markets are inefficient. In particular, portfolios based on firm size or earnings/price (E/P) ratios experience average returns systematically different from those predicted by the CAPM. Furthermore, the ‘abnormal’ returns persist for at least two years. This persistence reduces the likelihood that these results are being generated by a market inefficiency. Rather, the evidence seems to indicate that the equilibrium pricing model is misspecified. However, the data also reveals that an E/P effect does not emerge after returns are controlled for the firm size effect; the firm size effect largely subsumes the E/P effect. Thus, while the E/P anomaly and value anomaly exist when each variable is considered separately, the two anomalies seem to be related to the same set of missing factors, and these factors appear to be more closely associated with firm size than E/P ratios.
If both producers and consumers demand forecasts based solely on their forecasting ability, then the equilibrium employment of analysts, a higher cost factor than time series models, implies that analysts must produce better forecasts than time series models. Past studies of comparative earnings forecast accuracy have concluded otherwise. Using nonparametric statistics that provide proper yet powerful tests, we find that Box-Jenkins time series models consistently produce better forecasts than martingale and submartingale earnings models; but Value Line Investment Survey consistently makes significantly better earnings forecasts than the Box-Jenkins models.
An evaluation of security analysts' forecasts, The Accounting Review
- Timothy Crichtield
- Thomas Dyckman
- Josef Lakonishok
Crichtield, Timothy, Thomas Dyckman and Josef Lakonishok, 1978, An evaluation of security
analysts' forecasts, The Accounting Review, July, 651-668.
Timeliness of annual reports --Some empirical evidence, The Accounting Review, forthcoming. Gonedes, N., 1973, Properties of accounting numbers: Models and tests
- Givoly
- Dan Dan
- Palmon
Givoly, Dan and Dan Palmon, 1981, Timeliness of annual reports --Some empirical evidence, The Accounting Review, forthcoming. Gonedes, N., 1973, Properties of accounting numbers: Models and tests, Journal of Accounting Research, Autumn, 212-237.
Quarterly accounting data: Time series properties and predictive ability results, The Accounting Review
- George Foster
Foster, George, 1977, Quarterly accounting data: Time series properties and predictive ability
results, The Accounting Review, Jan., 1-21.
Classificatory smoothing of income with extraordinary items, The Accounting Review
- Amir Barnea
- Joshua Ronen
- Simcha Sadan
Barnea, Amir, Joshua Ronen and Simcha Sadan, 1976, Classificatory smoothing of income with
extraordinary items, The Accounting Review, Jan., 110-122.
Insiders and market efficiency
- Jaffe
Jaffe, Jeffrey F., 1976, Insiders and market efficiency, Journal of Finance, Sept., 1141-1148.
Timeliness of annual reports-Some empirical evidence, The Accounting Review
- Dan Givoly
- Dan Palmon
Givoly, Dan and Dan Palmon, 1981, Timeliness of annual reports-Some empirical evidence,
The Accounting Review, forthcoming.