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Shrunken earnings predictions are better predictions


  • Manfred Keil
  • Gary Smith
  • Margaret Smith


Analysts' earnings forecasts are not perfectly correlated with actual earnings. One statistical consequence is that the most optimistic and most pessimistic forecasts are usually too optimistic and too pessimistic. The forecasts' accuracy can be improved by shrinking them towards the mean. Insufficient appreciation of this statistical principle may partly explain the success of contrarian investment strategies, in particular why stocks with the most optimistic earnings forecasts underperform those with the most pessimistic forecasts.

Suggested Citation

  • Manfred Keil & Gary Smith & Margaret Smith, 2004. "Shrunken earnings predictions are better predictions," Applied Financial Economics, Taylor & Francis Journals, vol. 14(13), pages 937-943.
  • Handle: RePEc:taf:apfiec:v:14:y:2004:i:13:p:937-943 DOI: 10.1080/0960310042000284678

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    References listed on IDEAS

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    Cited by:

    1. H. E. Roman & R. A. Siliprandi & C. Dose & C. Riccardi & M. Porto, 2008. "Fluctuations of company yearly profits versus scaled revenue: Fat tail distribution of Levy type," Papers 0811.3885,

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