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On the Use of Naive Expectations of Earnings per Share as Experimental Benchmarks

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  • FRANK J. FINN
  • G. P. WHITTRED

Abstract

Both martingale and submartingale processes have been used as experimental benchmarks for corporate earnings forecasts or expectations in a large number of studies. This paper investigates the relative accuracy of forecasts from these two processes for a sample of Australian'firms. Submartingale models incorporating drift factors estimated over a large number of past observations consistently outperformed those using fewer observations, while the martingale model always outperformed the submartingale with drift factors estimaied over less than six prior earnings changes. The relative superiority of the martingale versus the best submartingale models used depended on whether a quadratic or linear error metric was deemed appropriate.

Suggested Citation

  • Frank J. Finn & G. P. Whittred, 1982. "On the Use of Naive Expectations of Earnings per Share as Experimental Benchmarks," The Economic Record, The Economic Society of Australia, vol. 58(2), pages 169-173, June.
    • Handle: RePEc:bla:ecorec:v:58:y:1982:i:2:p:169-173
    DOI: 10.1111/j.1475-4932.1982.tb00362.x
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    References listed on IDEAS

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    1. Watts, Rl & Leftwich, Rw, 1977. "Time-Series Of Annual Accounting Earnings," Journal of Accounting Research, Wiley Blackwell, vol. 15(2), pages 253-271.
    2. Ball, Ray & Watts, Ross, 1972. "Some Time Series Properties of Accounting Income," Journal of Finance, American Finance Association, vol. 27(3), pages 663-681, June.
    3. Beaver, William & Lambert, Richard & Morse, Dale, 1980. "The information content of security prices," Journal of Accounting and Economics, Elsevier, vol. 2(1), pages 3-28, March.
    4. Ball, R & Lev, B & Watts, R, 1976. "Income Variation And Balance-Sheet Compositions," Journal of Accounting Research, Wiley Blackwell, vol. 14(1), pages 1-9.
    5. Edwin J. Elton & Martin J. Gruber, 1972. "Earnings Estimates and the Accuracy of Expectational Data," Management Science, INFORMS, vol. 18(8), pages 409-424, April.
    6. Sharpe, Ian G. & Walker, R.G, 1975. "Asset Revaluations and Stock Market Prices," Working Papers 2, University of Sydney, School of Economics.
    7. Sharpe, Ig & Walker, Rg, 1975. "Asset Revaluations And Stock-Market Prices," Journal of Accounting Research, Wiley Blackwell, vol. 13(2), pages 293-310.
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    Cited by:

    1. Terry Shevlin & Greg Whittred, 1984. "Audit Qualifications and Share Prices: Further Evidence," Australian Journal of Management, Australian School of Business, vol. 9(1), pages 37-52, June.

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