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Financial Analysts’ Forecasts and Unprecedented Events: The Case of German Reunification

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  • WaQar Ghani
  • Samuel Szewczyk
  • Tayyeb Shabbir

Abstract

We use the chain of events from the fall of the Berlin Wall to the reunification of Germany to examine how capital market participants respond to momentous and unprecedented events. Our examination measures the impact of these events on analysts’ forecasts for the earnings of West German firms. Our results show a significant decrease in analysts’ ability to accurately forecast earnings. Contrary to the public’s euphoria, the sense of the market was generally negative about the implications of unification for West German firms. This negative sentiment was spread across most of the broad sectors, but within those sectors the results were significantly positive for select groups of industries. It appears that, in the face of this extraordinary event, financial analysts were detached from the emotions it engendered and were discriminating in their assessment of its impact. Copyright International Atlantic Economic Society 2007

Suggested Citation

  • WaQar Ghani & Samuel Szewczyk & Tayyeb Shabbir, 2007. "Financial Analysts’ Forecasts and Unprecedented Events: The Case of German Reunification," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 13(2), pages 123-138, May.
    • Handle: RePEc:kap:iaecre:v:13:y:2007:i:2:p:123-138:10.1007/s11294-007-9076-0
    DOI: 10.1007/s11294-007-9076-0
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    1. Beaver, Wh & Clarke, R & Wright, Wf, 1979. "Association Between Unsystematic Security Returns And The Magnitude Of Earnings Forecast Errors," Journal of Accounting Research, Wiley Blackwell, vol. 17(2), pages 316-340.
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    More about this item

    Keywords

    German reunification; financial analysts; forecast revisions; forecast errors; East Germany; West Germany; German economy; Berlin Wall; analysts’ expectations; sectoral valuation; event studies; forecast earnings; valuation effects; G14; P51;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • P51 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems

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