Keywords

analyst forecasts, time-series forecasts, random walk, analysts' superiority

Abstract

We re-examine the widely held belief that analysts‟ earnings per share (EPS) forecasts are superior to random walk (RW) time-series forecasts. We investigate whether analysts‟ annual EPS forecasts are superior, and if so, under what conditions. Simple RW EPS forecasts are more accurate than analysts‟ forecasts over longer horizons, for smaller or younger firms, and when analysts forecast negative or large changes in EPS. We also compare the accuracy of a third forecast of longer-term earnings based on a naïve extrapolation of analysts‟ one-year-ahead forecasts. Surprisingly, this naïve extrapolation provides the most accurate estimate of long-term (two- and three-year-ahead) earnings. These findings recharacterize prior generalizations about the superiority of analysts‟ forecasts and suggest that they are incomplete, misleading, or both. Moreover, in certain settings, researchers can rely on forecasts other than these explicit forecasts.

Original Publication Citation

Bradshaw, Mark T and Drake, Michael S. and Myers, James N. and Myers, Linda A., A Re-Examination of Analysts’ Superiority over Time-Series Forecasts of Annual Earnings. Review of Accounting Studies 17 (4), 2012. Available at SSRN: https://ssrn.com/abstract=1528987 or http://dx.doi.org/10.2139/ssrn.1528987

Document Type

Peer-Reviewed Article

Publication Date

2012

Publisher

Review of Accounting Studies

Language

English

College

Marriott School of Business

Department

Accountancy

University Standing at Time of Publication

Full Professor

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Accounting Commons

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