Long-term Earnings Forecasts in the Electric Utility Industry: Accuracy and Valuation Implications

Robert E Chatfield, Scott Hein and R Charles Moyer

The Financial Review, 1990, vol. 25, issue 3, 421-39

Abstract: This paper integrates research on the accuracy of alternative long-term earnings forecasts, the gain in accuracy achievable from combining various forecasts, and the power of different long-term earnings forecasts to explain stock prices. The tests are performed on 82 electric utility firms because of the relative homogeneity of accounting data in that industry and because of the importance of the findings for the determination of the cost of capital in a regulatory proceeding. The results are consistent with earlier research findings that analyst forecasts of long-term earnings growth are more accurate than forecasts from extrapolative models. combined forecasts applied to out-of-sample data, however, did not result in markedly improved forecasting accuracy. Finally, valuation tests of alternative forecasting techniques offered strong evidence that investors place the greatest weight on forecasts from Value Line. Copyright 1990 by MIT Press.

Date: 1990
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