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Firms’ Relative Operational Efficiency and Analysts’ Earnings Forecasts

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Relatively more efficient firms tend to maintain more stable levels of output and operating performance compared to their industry peers (Mills and Schumann 1985). Such firms also tend to have more sustainable performance (Berger et al. 1993). Given their more stable and sustainable levels of operating performance, we test the related prediction that financial analysts find the earnings of relatively more efficient firms to be more predictable. Using a stochastic frontier approach to measure firms’ relative operational efficiency, we find that analysts face less earnings uncertainty for relatively more efficient firms, compared to other firms in the same industry. We find that this broader more encompassing measure of firms’ relative operational efficiency yields stronger results than comparable accounting ratios (ROA and ROE). These results indicate that analysts behave as if they factor into their forecasts an understanding of the underlying economics of a business of an industry. Furthermore, the users of these forecasts can also benefit from this information in terms of assessing the level of reliability of forecasts.

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  • Fatma Cebenoyan & Donal Byard, 2003. "Firms’ Relative Operational Efficiency and Analysts’ Earnings Forecasts," Economics Working Paper Archive at Hunter College 302, Hunter College Department of Economics.
  • Handle: RePEc:htr:hcecon:302
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    1. Mills, David E & Schumann, Laurence, 1985. "Industry Structure with Fluctuating Demand," American Economic Review, American Economic Association, vol. 75(4), pages 758-767, September.
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    9. Hughes, Joseph P. & Lang, William W. & Mester, Loretta J. & Moon, Choon-Geol & Pagano, Michael S., 2003. "Do bankers sacrifice value to build empires? Managerial incentives, industry consolidation, and financial performance," Journal of Banking & Finance, Elsevier, vol. 27(3), pages 417-447, March.
    10. Allen, Linda & Rai, Anoop, 1996. "Operational efficiency in banking: An international comparison," Journal of Banking & Finance, Elsevier, vol. 20(4), pages 655-672, May.
    11. Kwan, Simon H. & Eisenbeis, Robert A., 1995. "An analysis of inefficiencies in banking," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 733-734, June.
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    Keywords

    Relative Operational Efficiency; Return on Assets; Return on Equity; Analysts’ Earnings Forecasts; Earnings Uncertainty.;

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