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Equity analysts’ earnings forecasts, collected by the Institutional Brokers’ Estimate Service (IBES), Zacks and other news providers, serve as a central input in financial research. For example, Claus & Thomas (2001) use earnings forecasts to estimate the equity risk premium. The equity risk premium, defined as the excess of the expected return on the market over the risk-free rate, is most commonly estimated via historical averages of ex post realized returns due to the unobservable character of the return expectations. However, in a new approach, they estimate the expected return of a security as the internal rate of return, which equates the stock price to the present value of expected future cash flows. Using analysts’ forecasts as a proxy for expected future cash flows, Claus & Thomas (2001) present that this forward-looking approach is a much better approximation.

Courteau et al. (2001), among others, use analysts’ estimates to analyze models of the fair value of companies. In particular, they investigate whether discounted cash flow (DCF) and residual income models (RIM) are equivalent, as predicted by Penman’s (1997) theory of “ideal? terminal value expressions. They find empirical evidence that there in fact prevails an equivalence of DCF and RIM models for finite horizons under ideal conditions. Furthermore, Clement & Tse (2003) use earnings forecasts to analyze whether investors efficiently process information about analysts’ characteristics in order to evaluate the expected accuracy of an equity analyst. The authors find evidence that investors fail to extract such information related to accuracy and that they rather rely on more direct observable aspects like the size of the broker firm which employs the analyst.

However, analysts’ earnings forecasts have come under scrutiny as several behavioral biases have been detected. For example, Richardson et al. (2004) show that analysts’ forecasts tend to be overly optimistic at the…

Schlagworte

Earnings Forecasts, Forecast Bias, Cross-sectional Earnings Model, Implied Cost of Capital, Forecast Accuracy, Finanzmanagement, Volkswirtschaftslehre, Betriebwirtschaftslehre