Evidence That Analyst Forecasts Do Not Reflect Their Expectations

The results of this article imply that analysts have become better informed about companies’ earnings prospects and have therefore become more accurate in forecasts made well in advance of the reporting period end. However, towards the reporting period end, when investors position themselves to prof...

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Bibliographic Details
Published inJournal of Investing Vol. 27; no. 4; pp. 7 - 18
Main Author Mozes, Haim A.
Format Journal Article Trade Publication Article
LanguageEnglish
Published London Pageant Media 01.12.2018
Subjects
Accuracy
Arbitrage
Earnings
Efficient markets
Fiscal years
Hedge funds
Investment policy
Investments
Profits
Proxies
Risk premiums
Securities markets
Stock exchanges
Stocks
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Summary:The results of this article imply that analysts have become better informed about companies’ earnings prospects and have therefore become more accurate in forecasts made well in advance of the reporting period end. However, towards the reporting period end, when investors position themselves to profit from earnings surprise, analysts’ earnings forecasts now deliberately reflect less of their true expectations and have become less accurate. A possible explanation for this development is that as analysts have better and more valuable private information, they have increased incentives to provide select clients with exclusive use of their private information. The implications are that i) an unintended effect of Reg FD may be that less information is now disseminated in financial markets, ii) the decline in hedge fund performance in recent years may be due to the greater uncertainty in determining market expectations, and iii) earnings surprise strategies might be successful again if one could better measure market expectations prior to the earnings announcement.
ISSN:1068-0896
2168-8613
DOI:10.3905/joi.2018.27.4.007