Do Accurate Earnings Forecasts Facilitate Superior Investment Recommendations?

Roger Loh and G. Mujtaba Mian
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Roger Loh: Ohio State U and Singapore Management U
G. Mujtaba Mian: National U of Singapore

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: We find that analysts who issue more accurate earnings forecasts also issue more profitable stock recommendations. The average factor-adjusted return associated with the recommendations of analysts in the highest accuracy quintile exceeds the return for analysts in the lowest accuracy quintile by 1.27% per month. Our findings provide indirect empirical support for valuation models in the accounting and finance literatures (e.g., Ohlson, 1995) that emphasize the role of future earnings in predicting stock price movements. Our results also suggest that imperfectly efficient markets reward information gatherers, such as security analysts, for their costly activities in generating superior earnings forecasts.

JEL-codes: G10 (search for similar items in EconPapers)
Date: 2005-03
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