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Evidence on the Superiority of Analysts Quarterly Earnings Forecasts for Small Capitalization Firms *
Author(s) -
Branson Bruce C.,
Lorek Kenneth S.,
Pagach Donald P.
Publication year - 1995
Publication title -
decision sciences
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.238
H-Index - 108
eISSN - 1540-5915
pISSN - 0011-7315
DOI - 10.1111/j.1540-5915.1995.tb01428.x
Subject(s) - earnings , univariate , econometrics , capitalization , business , investment decisions , investment (military) , economics , financial economics , finance , statistics , multivariate statistics , behavioral economics , linguistics , philosophy , mathematics , politics , political science , law
Financial analysts provide information to support investment analysis and decisions for an ever increasing number of firms. As part of their services they also produce earnings forecasts for covered firms. While there has been much research investigating the determinants of financial analyst earnings forecast superiority for large, widely‐followed firms, little research has focused on smaller firms. Until recently, these smaller firms have been largely ignored. This study focuses exclusively on small firms and provides evidence of differing behavior for such firms compared to results previously reported for large firms. Errors in quarterly earnings per share forecasts of small firms obtained from a univariate time‐series model are also examined. Regression results indicate that time‐series model parameters possess information content with respect to forecast accuracy for analyst‐covered firms only. These results are obtained after controlling for firm size, model adequacy, and industry, quarter, and year effects. This suggests that analysts are more likely to cover small firms for which they are able to decipher information correlated with that impounded in the “shocks” in the quarterly earnings time series as captured by the time‐series model parameters.