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Temporal changes in the value relevance of analysts' forecasts
Author(s) -
Johnston Joseph,
Guidry Ronald P.,
Trimble Madeline
Publication year - 2021
Publication title -
journal of corporate accounting and finance
Language(s) - English
Resource type - Journals
eISSN - 1097-0053
pISSN - 1044-8136
DOI - 10.1002/jcaf.22478
Subject(s) - relevance (law) , earnings , sample (material) , value (mathematics) , accounting information system , accounting , econometrics , economics , statistics , mathematics , political science , chemistry , chromatography , law
We examine the temporal change in the value relevance of analysts' forecasts relative to accounting information over a 42‐year period. The temporal change in value relevance is measured using the explained variation ( R 2 ) from the cross‐sectional regressions of security prices and returns on accounting metrics, specifically earnings and book value, alone and jointly with other information proxied by analysts' forecasts using a sample of 102,875 U.S. firm‐year observations. Prior research suggests that the value relevance of accounting information has declined over time. If investors are relying on metrics other than financial metrics, we would expect the reliance on analysts' forecasts to increase. Interestingly, the joint relevance of accounting and analysts' forecasts also declines over our sample period and the incremental relevance of analysts' forecasts remains constant over our sample period, suggesting that investors are not substituting analysts' forecasts for accounting information.