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Analyst Optimism and the Magnitude of Earnings Growth

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  • Harris, Richard

Abstract

This papaer evaluates analysts' consensus long run earnings growth forecasts. It is shown that the correlation between forecast earnings growth and actual earnings growth is extremely low. Consistent with other studies, forecast earnings growth is found to be too optimistic. This is illustrated by the fact that almost all earnings growth forecasts are positive, while actual earnings growth is more evenly distributed between positive and negative values. For the sample of companies for which actual earnings growth is positive, there is a stron positive correlation between forecast earnings growth and actual earnings growth. In sharp contrast for a sample of companies for which actual earnings growth is negative, there is a strong inverse correlation between forecast earnings growth and actual earnings growth. This suggests that analysts are to some extendt able to forecast the magnitude of earnings growth but not its sign. It is further shown that analysts' forecasts of long run earnings growth are incorporated into the market's expectation of future earnings growth. However, there is evidence that the market attaches more weight to forecasts that have the correct sign, even though the sign of the actual earnings growth is not known at that datae that the forecast is made.

Suggested Citation

  • Harris, Richard, 1997. "Analyst Optimism and the Magnitude of Earnings Growth," Discussion Papers 9708, University of Exeter, Department of Economics.
    • Handle: RePEc:exe:wpaper:9708
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    Cited by:

    1. Ortiz-Zarco, Ruth & Aali-Bujari, Ali, 2013. "Nivel de ingresos en la ocde: su influencia en el desarrollo del sistema financiero y el crecimiento económico," eseconomía, Escuela Superior de Economía, Instituto Politécnico Nacional, vol. 0(39), pages 7-30, tercer tr.

    More about this item

    Keywords

    Analysts' Forecasts; Earnings Growth; Rational Expectations; Panel Data.;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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