Pieter T. Elgers

The relative and complementary performance of analyst and security-price-based measures of expected earnings

Abstract This paper evaluates the relative performance of IBES consensus financial analyst forecasts and forecasts based upon the anticipatory behaviour of security prices, according to two criteria: (a) the accuracy of earnings growth predictions and (b) the contemporaneous association between unexpected earnings and security returns during the forecast year. Results are presented for firms in differing size groups, measured here by market capitalization. The results indicate that neither forecast source is superior to the other in terms of either criterion. There is, however, significant complementarity of financial analyst and price-based forecasts.

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.

Controlling for lagged stock price responses in pricing regressions: An application to the pricing of cash flows and accruals

This study reevaluates the securities markets differential pricing of the operating cash flow, current accrual (noncash working capital), and non-current accrual components of earnings. This reevaluation is motivated by evidence in Sloan [1996] of a lagged adjustment of securities prices to the differing implications of operating cash flows and accruals for future earnings. Similar to previous research, we find no statistically significant differential valuations of operating cash flows and current accruals in the conventional model that relates contemporary security returns to changes in these earnings components. When we allow for the markets multiyear correction of past mispricing and mean reversion in the earnings components, we document significant valuation differences for operating cash flows, relative to both current and noncurrent accruals.

Functional fixation in product pricing: A comparison of individuals and groups

Abstract This study tests the functional fixation hypothesis by comparing changes in the product pricing decisions of individuals and small groups in response to a fully disclosed, cosmetic change in depreciation method. The study provides several methodological refinements over earlier related studies. The research design incorporates full disclosure of the effect of accounting differences and a variety of measures are used to assess the impact of the accounting change, these revealing the inadequacy of the aggregate measures employed in earlier studies. Furthermore, the paper includes a comparison of the quality of group versus individual decision making with respect to functional fixation. The findings indicate that while individuals have a more pronounced shift in decision models than do groups, neither individuals nor groups fully adjust for the change.

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.