The term structure of loss preferences and rationality in analyst earnings forecasts

George Christodoulakis (), Konstantinos Stathopoulos and Nikolaos Tessaromatis
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George Christodoulakis: Manchester Business School, University of Manchester

Journal of Asset Management, 2012, vol. 13, issue 5, No 2, 310-326

Abstract: Abstract We show there is a term-structure in analysts’ loss preferences on corporate earnings forecast errors. Using the full I/B/E/S database on US corporate earnings, we estimate the loss function of consensus forecasts of each company in four different horizons and forecast types. Analysts are on average prudent in short horizons and evolve to optimism for longer horizons. Also, robust testing shows that forecast rationality is more evident in short horizons and much less in longer horizons. These loss preferences are found to be associated to sector and firm characteristics such as the actual earnings distribution, company size, debt and price to earnings ratios thus revealing association with the structure of managerial incentives. Their relevance increases for shorter horizons and preferences closer to pessimism.

Keywords: analyst; earnings; forecast; loss function; preferences (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1057/jam.2012.16

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