May H. Lo

Analysts' vs. investors' weightings of accruals in forecasting annual earnings

Abstract This paper examines whether financial analysts’ forecasts of annual earnings reflect an over-weighting of working-capital accruals that is comparable to the over-weighting implicit in securities prices documented in Sloan [Account. Rev. 71 (1996) 289] and Bradshaw et al. [J. Account. Res. 39 (2001) 45]. Our results indicate that the over-weighting of working-capital accruals in analysts’ earnings forecasts is less than one-third of the over-weighting by investors that is implicit in stock prices. Moreover, we are able to attribute less than 40% of the delayed securities returns associated with working-capital accruals to subsequent errors in analysts’ annual earnings forecasts, for firms with lower analyst coverage. These findings suggest that securities market inefficiencies that are unrelated to financial analysts’ earnings forecasts underlie at least part of the accruals-related anomaly.

Assessing investors’ earnings expectations: the contextual usefulness of composite forecasts

ABSTRACT This study constructs composite forecasts and evaluates their contextual usefulness as a proxy for investors’ expectations of annual earnings. Our empirical tests utilize composites of three forecast sources: financial analysts’, time-series and security-price based forecasts. Our full sample results support the incremental usefulness of composite forecasts, over and above that of any of the three forecast sources. Moreover, results from partitioned subsamples show that the usefulness of composite forecasts is contextual. Composite forecasts are a better proxy for investors’ earnings expectations when (1) the information environment is relatively poor; or (2) firms experience negative performance in the prior year.

Diversifying Earnings Forecast Errors via Composites of Market-Based, Analyst and Time-Series Predictions

Accuracy in predicting earnings is a fundamental concern in investment analysis. The substantial resources devoted to the production and dissemination of earnings forecasts evidence the reliance by investors upon earnings expectations for purposes of portfolio management.1 Analytical research in finance has established the relevance of earnings to security valuation, and empirical research has shown that shifts in earnings expectations are associated with revisions in security prices.