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A Positive Model of Earnings Forecasts: Top Down versus Bottom Up

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  • Masako N. Darrough

    (Baruch College, CUNY)

Abstract

This article analyzes the behavior of two groups of corporate earnings forecasters: analysts, who follow individual company fortunes, and market strategists, who predict earnings for various company aggregates. Using data for two market indices, the S&P 500 and the Dow Jones Industrial Average, we document that bottom-up forecasts are systematically more optimistic than top-down forecasts made by strategists. This difference is not driven by the difference in the forecast target. This finding may be explained by the incentives that analysts face and/or by cognitive bias.

Suggested Citation

  • Masako N. Darrough, 2002. "A Positive Model of Earnings Forecasts: Top Down versus Bottom Up," The Journal of Business, University of Chicago Press, vol. 75(1), pages 127-152, January.
    • Handle: RePEc:ucp:jnlbus:v:75:y:2002:i:1:p:127-152
    DOI: 10.1086/323507
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    Cited by:

    1. Lawrence, Michael & O'Connor, Marcus, 2005. "Judgmental forecasting in the presence of loss functions," International Journal of Forecasting, Elsevier, vol. 21(1), pages 3-14.
    2. Bruno Deschamps, 2015. "Are aggregate corporate earnings forecasts unbiased and efficient?," Review of Quantitative Finance and Accounting, Springer, vol. 45(4), pages 803-818, November.
    3. Ronald Doeswijk, 2008. "The Optimism Cycle: Sell in May," De Economist, Springer, vol. 156(2), pages 175-200, June.
    4. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    5. repec:dau:papers:123456789/1051 is not listed on IDEAS
    6. Andre Tomfort & Paulina Wiegand, 2020. "Anchoring among German financial analysts: An empirical and background analysis," Journal of Economics and Behavioral Studies, AMH International, vol. 12(5), pages 33-43.
    7. Brown, Anna Bergman & Lin, Guoyu & Zhou, Aner, 2022. "Analysts’ forecast optimism: The effects of managers’ incentives on analysts’ forecasts," Journal of Behavioral and Experimental Finance, Elsevier, vol. 35(C).
    8. Choi, Jung Ho & Kalay, Alon & Sadka, Gil, 2016. "Earnings news, expected earnings, and aggregate stock returns," Journal of Financial Markets, Elsevier, vol. 29(C), pages 110-143.
    9. Lambert, David & Matolcsy, Zoltan & Wyatt, Anne, 2015. "Analysts' earnings forecasts and technological conditions in the firm's investment environment," Journal of Contemporary Accounting and Economics, Elsevier, vol. 11(2), pages 104-120.
    10. Selima Mansour & Elyès Jouini & Clotilde Napp, 2006. "Is There a “Pessimisticâ€\x9D Bias in Individual Beliefs? Evidence from a Simple Survey," Theory and Decision, Springer, vol. 61(4), pages 345-362, December.
    11. George Athanasopoulos & Rob J Hyndman & Raffaele Mattera, 2023. "Improving out-of-sample Forecasts of Stock Price Indexes with Forecast Reconciliation and Clustering," Monash Econometrics and Business Statistics Working Papers 17/23, Monash University, Department of Econometrics and Business Statistics.
    12. Kadan, Ohad & Madureira, Leonardo & Wang, Rong & Zach, Tzachi, 2012. "Analysts' industry expertise," Journal of Accounting and Economics, Elsevier, vol. 54(2), pages 95-120.
    13. Ramnath, Sundaresh & Rock, Steve & Shane, Philip, 2008. "The financial analyst forecasting literature: A taxonomy with suggestions for further research," International Journal of Forecasting, Elsevier, vol. 24(1), pages 34-75.
    14. Ball, Ray & Sadka, Gil, 2015. "Aggregate earnings and why they matter," Journal of Accounting Literature, Elsevier, vol. 34(C), pages 39-57.
    15. Anna M. Cianci & Satoris S. Culbertson, 2010. "The Impact of Motivational and Cognitive Factors on Optimistic Earnings Forecasts," Chapters, in: Brian Bruce (ed.), Handbook of Behavioral Finance, chapter 11, Edward Elgar Publishing.
    16. Konchitchki, Yaniv & Patatoukas, Panos N., 2014. "Accounting earnings and gross domestic product," Journal of Accounting and Economics, Elsevier, vol. 57(1), pages 76-88.
    17. Holger Daske & Günther Gebhardt, 2006. "Zukunftsorientierte Bestimmung von Risikoprämien und Eigenkapitalkosten für die Unternehmensbewertung," Schmalenbach Journal of Business Research, Springer, vol. 58(4), pages 530-551, June.

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