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The role of accounting fundamentals and other information in analyst forecast errors
Author(s) -
MonteMor Danilo S.,
Galdi Fernando C.,
Costa Cristiano M.
Publication year - 2018
Publication title -
international finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 39
eISSN - 1468-2362
pISSN - 1367-0271
DOI - 10.1111/infi.12129
Subject(s) - pessimism , luck , component (thermodynamics) , econometrics , accounting , forecast error , accounting information system , decomposition , economics , physics , philosophy , theology , epistemology , thermodynamics , ecology , biology
In this paper, we study analyst forecast errors in the United States, and decompose these errors into two different sources: accounting fundamentals and other information. Using data from 1983 to 2012, our results lead to two conclusions. First, using the decomposition approach, we show that on average, the component of analyst forecast errors based on ‘accounting information’ is optimistic; however, the component of analyst forecast errors based on ‘other information’ is pessimistic. Second, although occasionally analysts make forecasts with small errors, the decomposition of such errors provide, on average, larger (positive) accounting errors, and larger (negative) other information errors. In this case, our results suggest that analysts' luck occasionally surpasses their skills.