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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Scharfstein, David. & Stein, Jeremy C., 1988.
"Herd behavior and investment,"
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WP 2062-88., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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