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Understanding Analysts' Earnings Expectations: Biases, Nonlinearities, and Predictability

  • Marco Aiolfi
  • Marius Rodriguez
  • Allan Timmermann

This paper studies the asymmetric behavior of negative and positive values of analysts' earnings revisions and links it to the conservatism principle of accounting. Using a new three-state mixture of lognormal models that accounts for differences in the magnitude and persistence of positive, negative, and zero revisions, we find evidence that revisions to analysts' earnings expectations can be predicted using publicly available information such as lagged interest rates and past revisions. We also find that our forecasts of revisions to analysts' earnings estimates help to predict the actual earnings figure beyond the information contained in analysts' earnings expectations. Copyright The Author 2009. Published by Oxford University Press. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/jjfinec/nbp024
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Article provided by Society for Financial Econometrics in its journal Journal of Financial Econometrics.

Volume (Year): 8 (2010)
Issue (Month): 3 (Summer)
Pages: 305-334

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Handle: RePEc:oup:jfinec:v:8:y:2010:i:3:p:305-334
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  1. Raffaella Giacomini & Halbert White, 2003. "Tests of conditional predictive ability," Boston College Working Papers in Economics 572, Boston College Department of Economics.
  2. Edwin J. Elton & Martin J. Gruber, 1972. "Earnings Estimates and the Accuracy of Expectational Data," Management Science, INFORMS, vol. 18(8), pages B409-B424, April.
  3. Harrison Hong & Jeffrey D. Kubik & Amit Solomon, 2000. "Security Analysts' Career Concerns and Herding of Earnings Forecasts," RAND Journal of Economics, The RAND Corporation, vol. 31(1), pages 121-144, Spring.
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  6. Ferson, Wayne E & Harvey, Campbell R, 1991. "The Variation of Economic Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 385-415, April.
  7. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
  8. Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, vol. 9(3), pages 221-235, September.
  9. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
  10. Clarke, Jonathan & Ferris, Stephen P. & Jayaraman, Narayanan & Lee, Jinsoo, 2006. "Are Analyst Recommendations Biased? Evidence from Corporate Bankruptcies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(01), pages 169-196, March.
  11. Harrison Hong & Jeffrey D. Kubik, 2003. "Analyzing the Analysts: Career Concerns and Biased Earnings Forecasts," Journal of Finance, American Finance Association, vol. 58(1), pages 313-351, 02.
  12. Chen, Qi & Francis, Jennifer & Jiang, Wei, 2005. "Investor learning about analyst predictive ability," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 3-24, February.
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  15. Brown, Lawrence D & Rozeff, Michael S, 1978. "The Superiority of Analyst Forecasts as Measures of Expectations: Evidence from Earnings," Journal of Finance, American Finance Association, vol. 33(1), pages 1-16, March.
  16. Klein, April, 1990. "A direct test of the cognitive bias theory of share price reversals," Journal of Accounting and Economics, Elsevier, vol. 13(2), pages 155-166, July.
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