Investor sophistication and market earnings expectations

Article Abstract:

A study was conducted to ascertain if sophisticated investors derive their earnings expectations from analyst forecasts or time-series model forecasts. In particular, this research aimed to determine if returns that are related to earnings announcements are linked to analyst forecasts for firms where the marginal investor has a greater probability of being sophisticated. Based on a sample of 89,246 firm-quarter observations, findings revealed that reliance on analyst forecasts is higher in firms with greater institutional ownership and analyst following. On the other hand, the use of the forecasts based on the seasonal random walk (SRW) model is less prevalent among firms with lesser institutional ownership and analyst following. Results demonstrated the relation between investor sophistication and the value assigned to analyst and SRW forecasts in earnings expectations.

Investors

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Do security analysts improve their performance with experience?

Article Abstract:

Earnings forecasts of security analysts become more accurate as they gain firm-specific experience. Such increased accuracy following firm-specific experience is recognized by the market in forming its expectations of earnings. These were gleaned from an examination of whether sell-side security analysts produce more accurate earnings forecast and more profitable stock recommendations as they gain more experience. Using the number of prior quarters for which the analyst has issued an earnings forecast for the firm, the study found that the absolute value of analysts' quarterly forecast errors substantially declines as their firm-specific experience increases. However, it was not examined how the improvement in forecasting performance is obtained.

Financial Forecasting, Practice, Business forecasting

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The effect of experience on security analyst underraction

Article Abstract:

The security analyst's underreaction to earlier earnings statistics with their increase in expertise suggests their reliable accuracy with experience. The yardstick for measuring the business specific forecasting experience of a security analyst is the number of earlier quarters for which the earnings forecast was issued.

Sales, profits & dividends, Venture Analysis, Company sales and earnings, Business enterprises, Company earnings/profit, Experience, Future earnings potential

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