Do accurate earnings forecasts faciitate superior investment recommendations?

We find that analysts who issue more accurate earnings forecasts also issue more profitable stock recommendations. The average factor-adjusted return associated with the recommendations of analysts in the highest accuracy quintile exceeds the corresponding return for analysts in the lowest accuracy...

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Bibliographic Details
Published inJournal of financial economics Vol. 80; no. 2; p. 455
Main Authors Loh, Roger K, G Mujtaba Mian
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier Sequoia S.A 01.05.2006
Subjects
Analysts
Earnings forecasting
Efficient markets
Investment policy
Rates of return
Stock prices
Studies
Valuation
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Summary:We find that analysts who issue more accurate earnings forecasts also issue more profitable stock recommendations. The average factor-adjusted return associated with the recommendations of analysts in the highest accuracy quintile exceeds the corresponding return for analysts in the lowest accuracy quintile by 1.27% per month. Our findings provide indirect empirical support for valuation models in the accounting and finance literatures (e.g., Ohlson, 1995) that emphasize the role of future earnings in predicting stock price movements. Our results also suggest that imperfectly efficient markets reward information gatherers, such as security analysts, for their costly activities in generating superior earnings forecasts. [PUBLICATION ABSTRACT]
ISSN:0304-405X
1879-2774