Edwin J. Elton, New York University Martin J. Gruber, New York University Mustafa Gultekin, New York University In this paper we explore the characteristics of analysts estimates of earnings per share. We have shown that on average over a wide variety of error measures that analysts errors decline monotonicaly as they prepare successive forecasts of fiscal year earnings. When we decomposed analysts' error we found that analysts were extremely accurate in estimating the average level of earnings for all stocks in our sample. When decomposing by level of aggregation the error in estimating company earnings (with industry error removed) was about 4 times the size of the error due to misestimating the level of industry earnings. Two other decomposition of errors by forecast characteristics were presented in the paper. We next showed that there is persistence in companies that analysts have difficulty in forecasting. If analysts on average have large errors when forecasting the earnings of a company in one year they are likely to have difficulty in the next year. Finally we examined some characteristics of the divergence across analysts in their estimate of a firm's earnings. Analysts tend to have greater divergence of opinion for the first 4 months of a year. However, there is no systematic decrease in divergence of opinim over the rest of the year. Analysts have greater disagreement about the earnings of certain industries. They tend to disagree more about the earnings of the same industries in different years. Finally disagreement is related to analysts errors but not in a stable manner.
The Financial Review – Wiley
Published: Jul 1, 1982
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