Reported earnings and analyst forecasts as competing sources of information: A new approach

Heather Anderson, Howard Chan, Robert Faff and Yew Kee Ho
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Howard Chan: Department of Finance, The University of Melbourne, Australia
Yew Kee Ho: Department of Finance and Accounting, National University of Singapore, Singapore

Australian Journal of Management, 2012, vol. 37, issue 3, 333-359

Abstract: We apply a new methodology, modified Granger causality tests, to further analyze the information flows between earnings and forecasts. Our application focuses on the dynamic interaction between reported earnings and analysts’ forecasts. Based on long time series of analyst earnings forecasts and reported earnings, we provide formal and compelling evidence of bi-directional ‘causality’. Further, we report that the lag structure in information flows is longer than has been documented in the previous literature. This is consistent with our expectation that, in addition to past earnings reports, the forecasts themselves make a significant contribution to the information that is reflected in future earnings. However, the presence of feedback also suggests that past earnings reports, as well as past forecasts, are incorporated into later forecasts. Collectively, our findings imply that the information in earnings reports has inherent positive value and that forecasts do not fully substitute for earnings releases.

Keywords: Analyst forecasts; Granger causality; information flows; reported earnings (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (2)

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Working Paper: Reported Earnings and Analyst Forecasts as Competing Sources of Information: A New Approach (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:37:y:2012:i:3:p:333-359

DOI: 10.1177/0312896211434574

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