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Reported earnings and analyst forecasts as competing sources of information: A new approach

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Author Info

  • Heather Anderson

    (Department of Econometrics and Business Statistics, Monash University, Australia)

  • Howard Chan

    (Department of Finance, The University of Melbourne, Australia)

  • Robert Faff

    (UQ Business School, University of Queensland, Australia)

  • Yew Kee Ho

    (Department of Finance and Accounting, National University of Singapore, Singapore)

Abstract

We apply a new methodology, modified Granger causality tests, to further analyze the information flows between earnings and forecasts. Our application focuses on the dynamic interaction between reported earnings and analysts’ forecasts. Based on long time series of analyst earnings forecasts and reported earnings, we provide formal and compelling evidence of bi-directional ‘causality’. Further, we report that the lag structure in information flows is longer than has been documented in the previous literature. This is consistent with our expectation that, in addition to past earnings reports, the forecasts themselves make a significant contribution to the information that is reflected in future earnings. However, the presence of feedback also suggests that past earnings reports, as well as past forecasts, are incorporated into later forecasts. Collectively, our findings imply that the information in earnings reports has inherent positive value and that forecasts do not fully substitute for earnings releases.

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File URL: http://aum.sagepub.com/content/37/3/333.abstract
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Bibliographic Info

Article provided by Australian School of Business in its journal Australian Journal of Management.

Volume (Year): 37 (2012)
Issue (Month): 3 (December)
Pages: 333-359

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Handle: RePEc:sae:ausman:v:37:y:2012:i:3:p:333-359

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Web page: http://www.agsm.edu.au

Related research

Keywords: Analyst forecasts; Granger causality; information flows; reported earnings;

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  1. Timmermann, Allan G, 2005. "Forecast Combinations," CEPR Discussion Papers 5361, C.E.P.R. Discussion Papers.
  2. Foster, George, 1981. "Intra-industry information transfers associated with earnings releases," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 201-232, December.
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  11. Beaver, William & Lambert, Richard & Morse, Dale, 1980. "The information content of security prices," Journal of Accounting and Economics, Elsevier, vol. 2(1), pages 3-28, March.
  12. Brennan, Michael J & Jegadeesh, Narasimhan & Swaminathan, Bhaskaran, 1993. "Investment Analysis and the Adjustment of Stock Prices to Common Information," Review of Financial Studies, Society for Financial Studies, vol. 6(4), pages 799-824.
  13. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
  14. Bartov, Eli & Givoly, Dan & Hayn, Carla, 2002. "The rewards to meeting or beating earnings expectations," Journal of Accounting and Economics, Elsevier, vol. 33(2), pages 173-204, June.
  15. Ball, Ray & Bartov, Eli, 1996. "How naive is the stock market's use of earnings information?," Journal of Accounting and Economics, Elsevier, vol. 21(3), pages 319-337, June.
  16. Bronwyn H. Hall & Adam Jaffe & Manuel Trajtenberg, 2005. "Market Value and Patent Citations," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 16-38, Spring.
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