Article1998

Dispersion in Analysts' Earnings Forecasts as a Measure of Uncertainty

268 citations0/0 files storedJournal of Accounting Auditing & Finance

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Auditing, Earnings Management, Governance Financial Markets and Investment Strategies Forecasting Techniques and Applications

Abstract

This study examines whether dispersion in analysts' earnings forecasts reflects uncertainty about firms' future economic performance. Prior research examining this issue has been inconclusive. These studies have concluded that forecast dispersion is likely to reflect factors other than uncertainty about future cash flows, such as uncertainty about the price irrelevant component of firms' financial reports (Daley et al. [1988]; Imhoff and Lobo [1992]). Abarbanell et al. (1995) argue that, if forecast dispersion after (i.e., conditional on) an earnings announcement reflects uncertainty about firms' future cash flows and this uncertainty causes investors to desire additional information, then dispersion will be positively associated with both (a) the level of demand for more information and (b) the magnitude of price reactions around the subsequent earnings release. In this study, we construct a measure of informational demand using the incidence of analyst forecast updating after dispersion is measured. We find a positive association between dispersion in earnings forecasts after an earnings release and this measure of informational demand. We also find a positive association between forecast dispersion and the magnitude of price reactions around subsequent earnings releases. These associations are most apparent when potentially stale (or outdated) forecasts are removed from measures of forecast dispersion. These associations also persist after controlling for other measures of uncertainty (e.g., beta and the variance of daily stock returns), consistent with dispersion in analysts' earnings forecasts serving as a useful indicator of uncertainty about the price relevant component of firms' future earnings.

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References

1992The Cross-Section of Expected Stock Returns 1996Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC*1996Corporate Disclosure Policy and Analyst Behavior.1989Firm characteristics and analyst following 1994Analyst Forecasts and Herding Behavior:1984Timeliness of Reporting and the Stock Price Reaction to Earnings Announcements 1987Cross-Sectional Dependence and Problems in Inference in Market-Based Accounting Research 1987Firm size and the information content of prices with respect to earnings

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