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Rationality of analysts’ earnings forecasts: evidence from dow 30 companies

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Author Info
Sunil K. Mohanty
Edward N. W. Aw
Abstract

We test the rationality of analysts’ earnings forecasts for Dow 30 companies using an improved statistical methodology that accounts for non-stationarity in time-series data, non-normality in co-integrating regression, and serial correlation of forecast errors. Using one-quarter-ahead forecasts from 1984:Q4--2000:Q1 and analyzing firm-by-firm for Dow 30, we find that the earnings forecasts for at least two-third of our sample firms are consistent with the prediction of rational expectations hypothesis (REH). The most important implication of this finding is that it is premature to conclude that analysts’ estimates are irrational and systematically biased.

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Article provided by Taylor and Francis Journals in its journal Applied Financial Economics.

Volume (Year): 16 (2006)
Issue (Month): 12 (August)
Pages: 915-929
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Handle: RePEc:taf:apfiec:v:16:y:2006:i:12:p:915-929

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  1. Michaely, Roni & Womack, Kent L, 1999. "Conflict of Interest and the Credibility of Underwriter Analyst Recommendations," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(4), pages 653-86.
  2. Degeorge, François & Patel, U & Zeckhauser, Richard, 1998. "Earnings Management to Exceed Thresholds," CEPR Discussion Papers 1790, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  3. Aggarwal, Raj & Mohanty, Sunil & Song, Frank, 1995. "Are Survey Forecasts of Macroeconomic Variables Rational?," Journal of Business, University of Chicago Press, vol. 68(1), pages 99-119, January. [Downloadable!] (restricted)
  4. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220 National Bureau of Economic Research, Inc. [Downloadable!]
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  5. Welch, Ivo, 2000. "Herding among security analysts," Journal of Financial Economics, Elsevier, vol. 58(3), pages 369-396, December. [Downloadable!] (restricted)
  6. John C. Easterwood & Stacey R. Nutt, 1999. "Inefficiency in Analysts' Earnings Forecasts: Systematic Misreaction or Systematic Optimism?," Journal of Finance, American Finance Association, vol. 54(5), pages 1777-1797, October. [Downloadable!] (restricted)
  7. Womack, Kent L, 1996. " Do Brokerage Analysts' Recommendations Have Investment Value?," Journal of Finance, American Finance Association, vol. 51(1), pages 137-67, March. [Downloadable!] (restricted)
  8. Michael P. Keane & David E. Runkle, 1998. "Are Financial Analysts' Forecasts of Corporate Profits Rational?," Journal of Political Economy, University of Chicago Press, vol. 106(4), pages 768-805, August. [Downloadable!] (restricted)
  9. La Porta, Rafael, 1996. " Expectations and the Cross-Section of Stock Returns," Journal of Finance, American Finance Association, vol. 51(5), pages 1715-42, December. [Downloadable!] (restricted)
  10. Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, vol. 80(3), pages 465-79, June.
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  11. De Bondt, Werner F M & Thaler, Richard H, 1990. "Do Security Analysts Overreact?," American Economic Review, American Economic Association, vol. 80(2), pages 52-57, May. [Downloadable!] (restricted)
  12. Søren Johansen & Katarina Juselius, 1988. "Hypothesis Testing for Cointegration Vectors: with Application to the Demand for Money in Denmark and Finland," Discussion Papers 88-05, University of Copenhagen. Department of Economics.
  13. Josef Lakonishok & Robert W. Vishny & Andrei Shleifer, 1993. "Contrarian Investment, Extrapolation, and Risk," NBER Working Papers 4360, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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