On the relation between predictable market returns and predictable analyst forecast errors

On the relation between predictable market returns and predictable analyst forecast errors We investigate the relation between predictable market returns and predictable analyst forecast errors. Perfect correlation between predictable components of forecast errors and abnormal returns would lend credence to the view that pricing anomalies are not merely an artifact of inadequately controlled risk. Our evidence implies an imperfect correlation. Moreover, we find that while the predictable component of abnormal returns is significantly associated with future forecast errors, trading strategies based directly on the predictable component of forecast errors are not profitable. Further implications of our findings are that predictable components of analysts’ forecast errors are robust with respect to loss functions and analysts’ earnings forecasts may significantly diverge from the market expectations. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

On the relation between predictable market returns and predictable analyst forecast errors

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Publisher
Springer US
Copyright
Copyright © 2008 by Springer Science+Business Media, LLC
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-007-9065-9
Publisher site
See Article on Publisher Site

References

  • Evidence that stock prices do not fully reflect the implications of current earnings for future earnings
    Bernard, V.; Thomas, J.
  • Disclosure level and the cost of equity capital
    Botosan, C.
  • Analysts’ decisions as products of a multi-task environment
    Francis, J.; Philbrick, D.
  • Predicting the equity premium with dividend ratios
    Goyal, A.; Welch, I.
  • Predictability bias in the U.S. equity market
    Huberts, L.; Fuller, R.
  • Fundamental information analysis
    Lev, B.; Thiagarajan, S.

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