Alternative adjustments to analysts’ earnings forecasts: relative and complementary performance

Abstract This study examines the relative and complementary performance of alternative earnings forecast adjustments using a common set of consensus analysts’ earnings forecasts. We document that a simple adjustment to analysts’ earnings forecasts, based solely on cross‐sectional relationships between actual and forecasted earnings in the prior year, performs as well as more complicated adjustment methods, i.e., composite forecasts and persistence adjusted forecasts. A forecast adjustment that is based on prior year earnings and returns, however, provides significant incremental reductions in forecast error and dominates all of the other adjustment methods.