An Information Interpretation of Financial Analyst Superiority in Forecasting Earnings

  • Brown L
  • Richardson G
  • Schwager S
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Abstract

This paper presents a model that provides determinants of ex ante forecast accuracy and examines conditions under which a particular forecasting approach (i,e., the use of analysts' forecasts) would yield a superior measure for earnings surprise. Insights are offered on how to partition observations using ex ante measures of forecast accuracy for comparing alternative surrogates for earnings surprise. For example, we show theoretically that FAF superiority is positively related to the dimensionality of the information set used to generate FAF. This implies that using a TS model rather than FAF to generate a measure of the market's expectation of earnings induces measurement error that is positively related to our measure of information dimensionality. [ABSTRACT FROM AUTHOR]

Author-supplied keywords

  • ANALYSTS (Finance)
  • BUSINESS cycles
  • BUSINESS forecasting
  • CORPORATE profits
  • CORPORATIONS -- Finance
  • EARNINGS trends
  • ECONOMETRICS
  • ECONOMIC forecasting
  • ECONOMIC models
  • ECONOMICS -- Statistical methods
  • FINANCIAL performance

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Authors

  • Lawrence D Brown

  • Gordon D Richardson

  • Steven J Schwager

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