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Analysts’ Earnings Forecasts for DAX100 Firms During the Stock Market Boom of the 1990s

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  • Martin Wallmeier

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    Abstract

    This paper examines the reliability of financial analysts’ consensus earnings forecasts in the 1990s. Analysts are often accused of having fuelled the stock market boom with exaggerated evaluations of firms’ prospects. However, this criticism primarily refers to the analysts’ buy recommendations rather than earnings forecasts. Although biases in earnings forecasts have been reported since the 1980s, a systematic study capturing the period of ‘irrational exuberance’ until 2000 on the German stock market has not yet been published. Our data set consists of DAX100 firms, leaving out the peculiarities of forecasting earnings (or rather losses) of young technology firms. To evaluate the information content of analysts’ forecasts, we confront them with five alternative forecasting models. The empirical results reveal that analysts’ forecasts were too optimistic throughout the entire sample period. However, contrary to the increase in stock prices, the optimistic bias has declined over time. If the bias is removed, the analysts’ consensus forecasts significantly outperform all other models considered. Thus, the forecasts seem to be informative with respect to earnings differences, even if the market level of earnings is optimistically overstated. Copyright Swiss Society for Financial Market Research 2005

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    File URL: http://hdl.handle.net/10.1007/s11408-005-3382-4
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    Bibliographic Info

    Article provided by Springer in its journal Financial Markets and Portfolio Management.

    Volume (Year): 19 (2005)
    Issue (Month): 2 (August)
    Pages: 131-151

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    Handle: RePEc:kap:fmktpm:v:19:y:2005:i:2:p:131-151

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    8. Bulkley, George & Harris, Richard, 1996. "Irrational Analysts' Expectations as a Cause of Excess Volatility in Stock Prices," Discussion Papers 9608, Exeter University, Department of Economics.
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    Cited by:
    1. Krotter, Simon, 2006. "Durchbrechungen des Kongruenzprinzips und Residualgewinne Broken Link Between Accounting and Finance?," University of Regensburg Working Papers in Business, Economics and Management Information Systems 411, University of Regensburg, Department of Economics.
    2. Alexander Kerl & Oscar Stolper & Andreas Walter, 2012. "Tagging the triggers: an empirical analysis of information events prompting sell-side analyst reports," Financial Markets and Portfolio Management, Springer, vol. 26(2), pages 217-246, June.
    3. Stefan Kanne & Jan Klobucnik & Daniel Kreutzmann & Soenke Sievers, 2012. "To buy or not to buy? The value of contradictory analyst signals," Financial Markets and Portfolio Management, Springer, vol. 26(4), pages 405-428, December.

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