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Rationality of analysts' earnings forecasts: evidence from dow 30 companies

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  • Sunil Mohanty
  • Edward Aw

Abstract

We test the rationality of analysts' earnings forecasts for Dow 30 companies using an improved statistical methodology that accounts for non-stationarity in time-series data, non-normality in co-integrating regression, and serial correlation of forecast errors. Using one-quarter-ahead forecasts from 1984:Q4-2000:Q1 and analyzing firm-by-firm for Dow 30, we find that the earnings forecasts for at least two-third of our sample firms are consistent with the prediction of rational expectations hypothesis (REH). The most important implication of this finding is that it is premature to conclude that analysts' estimates are irrational and systematically biased.

Suggested Citation

  • Sunil Mohanty & Edward Aw, 2006. "Rationality of analysts' earnings forecasts: evidence from dow 30 companies," Applied Financial Economics, Taylor & Francis Journals, vol. 16(12), pages 915-929.
  • Handle: RePEc:taf:apfiec:v:16:y:2006:i:12:p:915-929
    DOI: 10.1080/09603100500426564
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    Cited by:

    1. Fabrizio Mattesini & Leonardo Becchetti, 2009. "The stock market and the Fed," Applied Financial Economics, Taylor & Francis Journals, vol. 19(2), pages 99-110.
    2. de Jong, Pieter J. & Apilado, Vince P., 2009. "The changing relationship between earnings expectations and earnings for value and growth stocks during Reg FD," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 435-442, February.

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