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Earnings forecasts: the case for combining analysts’ estimates with a cross-sectional model

Author

Listed:
  • Vitor Azevedo

    (Technical University of Munich)

  • Patrick Bielstein

    (Barclays Bank PLC)

  • Manuel Gerhart

    (Information Services Group Germany GmbH)

Abstract

We propose a novel method to forecast corporate earnings, which combines the accuracy of analysts’ forecasts with the unbiasedness of a cross-sectional model. We build on recent insights from the earnings forecasts literature to improve analysts’ forecasts in two ways: reducing their sluggishness with respect to information in recent stock price movements and improving their long-term performance. Our model outperforms the most popular methods from the literature in terms of forecast accuracy, bias, and earnings response coefficient. Furthermore, using our estimates in the implied cost of capital calculation leads to a substantially stronger correlation with realized returns compared to earnings estimates from extant cross-sectional models.

Suggested Citation

  • Vitor Azevedo & Patrick Bielstein & Manuel Gerhart, 2021. "Earnings forecasts: the case for combining analysts’ estimates with a cross-sectional model," Review of Quantitative Finance and Accounting, Springer, vol. 56(2), pages 545-579, February.
    • Handle: RePEc:kap:rqfnac:v:56:y:2021:i:2:d:10.1007_s11156-020-00902-z
    DOI: 10.1007/s11156-020-00902-z
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    References listed on IDEAS

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    Cited by:

    1. Moritz Scherrmann & Ralf Elsas, 2023. "Earnings Prediction Using Recurrent Neural Networks," Papers 2311.10756, arXiv.org.
    2. Azevedo, Vitor, 2023. "Analysts’ underreaction and momentum strategies," Journal of Economic Dynamics and Control, Elsevier, vol. 146(C).

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    More about this item

    Keywords

    Earnings forecasts; Analysts’ forecasts; Forecast evaluation; Implied cost of capital; Expected returns;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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