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Performance of Analyst's Earnings Forecasting - Evidence from the Finnish Emerging Markets 1987-2005

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Author Info

  • Kepsu, Mikko
  • Schadewitz, Hannu
  • Vieru, Markku

Abstract

Financial analysts comprise one important group of information intermediaries between firms and investors (Healy & Palepu, 2001). They have great potential to decrease information asymmetry between firms and investors, resulting in better allocation of capital. Analysts’ work is influenced by, among other things, the quality and quantity of information available from the target firms. Furthermore, analysts' incentives could be influenced by the employer's other affairs with the client. Our paper has three purposes : 1) to review the main research literature on analysts' activity and performance, 2) to describe the development of analysts' activity in the period 1987-2005 in a Finnish emerging market, and 3) to analyse the impact of market regulation and market cycles on analysts' performance. Performance is studied in three dimensions: forecasting accuracy, forecast bias, and forecasting efficiency. Analysts' data are based on I/B/E/S. Our analysis shows the rapid development of analysts' activity, both in terms of the number of forecasts and longer forecasting horizons. Overall, the result supports the conclusion that analysts tend to be somewhat pessimistic in their Earnings per share (EPS) forecasts. Furthermore, the corrective actions taken have been somewhat sluggish (delays in EPS revisions). However, the forecasts improved significantly in the close before the actual EPS releases (0-1 month sample). Finally, analysts were not fully taking into account prior EPS development. This further supports the view that analysts underestimate the value of prior earnings change in their current earnings forecasting.

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Bibliographic Info

Paper provided by The Research Institute of the Finnish Economy in its series Discussion Papers with number 1160.

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Length: 26 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:rif:dpaper:1160

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Keywords: analysts' earnings forecasts; emerging markets;

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  1. Ole-Kristian Hope, 2003. "Disclosure Practices, Enforcement of Accounting Standards, and Analysts' Forecast Accuracy: An International Study," Journal of Accounting Research, Wiley Blackwell, vol. 41(2), pages 235-272, 05.
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  3. Mikhail, Michael B. & Walther, Beverly R. & Willis, Richard H., 2003. "The effect of experience on security analyst underreaction," Journal of Accounting and Economics, Elsevier, vol. 35(1), pages 101-116, April.
  4. Clement, Michael B., 1999. "Analyst forecast accuracy: Do ability, resources, and portfolio complexity matter?," Journal of Accounting and Economics, Elsevier, vol. 27(3), pages 285-303, July.
  5. Lynn Hodgkinson, 2001. "Analysts' Forecasts and the Broker Relationship," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(7&8), pages 943-961.
  6. Roger K. Loh & Mujtaba Mian, 2003. "The Quality of Analysts' Earnings Forecasts During the Asian Crisis: Evidence from Singapore," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(5-6), pages 749-770.
  7. Michael Eames, 2002. "The Association between Trading Recommendations and Broker-Analysts' Earnings Forecasts," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 85-104, 03.
  8. Frankel, Richard & Kothari, S.P. & Weber, Joseph, 2006. "Determinants of the informativeness of analyst research," Journal of Accounting and Economics, Elsevier, vol. 41(1-2), pages 29-54, April.
  9. Juha Kinnunen & Jyrki Niskanen & Eero Kasanen, 2000. "To whom are IAS earnings informative? Domestic versus foreign shareholders' perspectives," European Accounting Review, Taylor & Francis Journals, vol. 9(4), pages 499-517.
  10. Terence Lim, 2001. "Rationality and Analysts' Forecast Bias," Journal of Finance, American Finance Association, vol. 56(1), pages 369-385, 02.
  11. Patricia C. O'Brien & Maureen F. Mcnichols & Lin Hsiou-Wei, 2005. "Analyst Impartiality and Investment Banking Relationships," Journal of Accounting Research, Wiley Blackwell, vol. 43(4), pages 623-650, 09.
  12. Healy, Paul M. & Palepu, Krishna G., 2001. "Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 405-440, September.
  13. Michael B. Clement & Senyo Y. Tse, 2005. "Financial Analyst Characteristics and Herding Behavior in Forecasting," Journal of Finance, American Finance Association, vol. 60(1), pages 307-341, 02.
  14. Robert M. Bushman & Joseph D. Piotroski & Abbie J. Smith, 2005. "Insider Trading Restrictions and Analysts' Incentives to Follow Firms," Journal of Finance, American Finance Association, vol. 60(1), pages 35-66, 02.
  15. Solomon Tadesse & Chuck Kwok, 2005. "National Culture and Financial Systems," William Davidson Institute Working Papers Series wp884, William Davidson Institute at the University of Michigan.
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