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The term structure of loss preferences and rationality in analyst earnings forecasts

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  • George Christodoulakis

    (Manchester Business School, University of Manchester)

  • Konstantinos Stathopoulos
  • Nikolaos Tessaromatis

Abstract

We show there is a term-structure in analysts’ loss preferences on corporate earnings forecast errors. Using the full I/B/E/S database on US corporate earnings, we estimate the loss function of consensus forecasts of each company in four different horizons and forecast types. Analysts are on average prudent in short horizons and evolve to optimism for longer horizons. Also, robust testing shows that forecast rationality is more evident in short horizons and much less in longer horizons. These loss preferences are found to be associated to sector and firm characteristics such as the actual earnings distribution, company size, debt and price to earnings ratios thus revealing association with the structure of managerial incentives. Their relevance increases for shorter horizons and preferences closer to pessimism.

Suggested Citation

  • George Christodoulakis & Konstantinos Stathopoulos & Nikolaos Tessaromatis, 2012. "The term structure of loss preferences and rationality in analyst earnings forecasts," Journal of Asset Management, Palgrave Macmillan, vol. 13(5), pages 310-326, October.
    • Handle: RePEc:pal:assmgt:v:13:y:2012:i:5:d:10.1057_jam.2012.16
    DOI: 10.1057/jam.2012.16
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