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Why Do EPS Forecast Error and Dispersion Not Vary with Scale? Implications for Analyst and Managerial Behavior
Author(s) -
CHEONG FOONG SOON,
THOMAS JACOB
Publication year - 2011
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/j.1475-679x.2010.00387.x
Subject(s) - econometrics , earnings , scale (ratio) , forecast error , volatility (finance) , variation (astronomy) , dispersion (optics) , stock (firearms) , cash flow , exponential smoothing , smoothing , economics , consensus forecast , financial economics , statistics , accounting , mathematics , geography , physics , cartography , archaeology , astrophysics , optics
We document a counter‐intuitive finding regarding analyst forecasts of quarterly earnings per share (EPS): magnitudes of deviations from benchmarks—individual forecasts versus consensus (dispersion) and consensus versus actual (forecast error)—do not vary with scale. Seasonally differenced EPS, or time‐series forecast error, also exhibits substantial lack of variation with scale, but only for firms followed by analysts. This lack of variation with scale is not observed for analyst and time‐series forecasts for (a) EPS for some countries, (b) sales and cash flows for all countries, and (c) stock splits. We propose and investigate different explanations for these puzzling regularities that have important implications for practice and research. We believe the cause is managerial smoothing of EPS designed to reduce across‐firm variation in EPS volatility.