Reported earnings and analyst forecasts as competing sources of information: A new approach

Heather Margot Anderson, Howard Chan, Robert Faff, Yew Kee Ho

Research output: Contribution to journalArticleResearchpeer-review

Abstract

We apply a new methodology, modified Granger causality tests, to further analyze the information flows between earnings and forecasts. Our application focuses on the dynamic interaction between reported earnings and analysts forecasts. Based on long time series of analyst earnings forecasts and reported earnings, we provide formal and compelling evidence of bi-directional causality . Further, we report that the lag structure in information flows is longer than has been documented in the previous literature. This is consistent with our expectation that, in addition to past earnings reports, the forecasts themselves make a significant contribution to the information that is reflected in future earnings. However, the presence of feedback also suggests that past earnings reports, as well as past forecasts, are incorporated into later forecasts. Collectively, our findings imply that the information in earnings reports has inherent positive value and that forecasts do not fully substitute for earnings releases.
Original languageEnglish
Pages (from-to)333 - 359
Number of pages27
JournalAustralian Journal of Management
Volume37
Issue number3
DOIs
Publication statusPublished - 2012

Cite this

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abstract = "We apply a new methodology, modified Granger causality tests, to further analyze the information flows between earnings and forecasts. Our application focuses on the dynamic interaction between reported earnings and analysts forecasts. Based on long time series of analyst earnings forecasts and reported earnings, we provide formal and compelling evidence of bi-directional causality . Further, we report that the lag structure in information flows is longer than has been documented in the previous literature. This is consistent with our expectation that, in addition to past earnings reports, the forecasts themselves make a significant contribution to the information that is reflected in future earnings. However, the presence of feedback also suggests that past earnings reports, as well as past forecasts, are incorporated into later forecasts. Collectively, our findings imply that the information in earnings reports has inherent positive value and that forecasts do not fully substitute for earnings releases.",
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Reported earnings and analyst forecasts as competing sources of information: A new approach. / Anderson, Heather Margot; Chan, Howard; Faff, Robert; Ho, Yew Kee.

In: Australian Journal of Management, Vol. 37, No. 3, 2012, p. 333 - 359.

Research output: Contribution to journalArticleResearchpeer-review

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