Roger K. Loh, G. Mujtaba Mian
Journal of Financial Economics 80(2), 455–483 (2006).
Roger K. Loh, G. Mujtaba Mian. Do Accurate Earnings Forecasts Facilitate Superior Investment Recommendations? Journal of Financial Economics 80(2), 455–483 (2006).
IN ONE SENTENCE:
Analysts who forecast earnings more accurately also issue more profitable stock recommendations.
Abstract:
We find that analysts who issue more accurate earnings forecasts also issue more profitable stock recommendations. The average factor-adjusted return associated with the recommendations of analysts in the highest accuracy quintile exceeds the corresponding return for analysts in the lowest accuracy quintile by 1.27% per month. Our findings provide indirect empirical support for valuation models in the accounting and finance literatures (e.g., Ohlson, 1995) that emphasize the role of future earnings in predicting stock price movements. Our results also suggest that imperfectly efficient markets reward information gatherers, such as security analysts, for their costly activities in generating superior earnings forecasts.
Other Links/Materials:
CFA Digest 36(4), 2006, 41–42 — Practitioner digest
Keywords:
Forecast accuracy · Security analysts · Earnings-based valuation · Recommendation profitability · Analyst skill · Stock recommendations · Information production · Equity valuation · Empirical asset pricing