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Can financial statement analysis beat consensus analysts’ recommendations?

Author

Listed:
  • James M. Wahlen

    (Indiana University)

  • Matthew M. Wieland

    (University of Georgia)

Abstract

We examine whether investors can exploit financial statement information to identify companies with a greater likelihood of future earnings increases and whether stocks of those companies generate 1-year abnormal returns that exceed the abnormal returns from following analysts’ consensus recommendations. Our approach summarizes financial statement information into a “predicted earnings increase score,” which captures the likelihood of 1-year-ahead earnings increases. We find that, within our sample of consensus recommendations, stocks with high scores are much more likely to experience future earnings increases than stocks with low scores. A hedge portfolio strategy that utilizes our approach within each consensus recommendation level generates average annual abnormal returns of 10.9 percent over our 12-year sample period, after controlling for previously identified risk factors. These abnormal returns exceed those available from following analysts’ consensus recommendations. Our results show that share prices and consensus recommendations fail to impound financial statement information that helps predict future earnings changes.

Suggested Citation

  • James M. Wahlen & Matthew M. Wieland, 2011. "Can financial statement analysis beat consensus analysts’ recommendations?," Review of Accounting Studies, Springer, vol. 16(1), pages 89-115, March.
    • Handle: RePEc:spr:reaccs:v:16:y:2011:i:1:d:10.1007_s11142-010-9124-5
    DOI: 10.1007/s11142-010-9124-5
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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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