Do accurate earnings forecasts facilitate superior investment recommendations

By Roger K. Loh. 2006

336 citations recorded by the source corpus.

We find that analysts who issue more accurate earnings forecasts also issue more profitable stock recommendations. The average factor-adjusted return associated with the recommendations of analysts in the highest accuracy quintile exceeds the corresponding return for analysts in the lowest accuracy quintile by 1.27% per month. Our findings provide indirect empirical support for valuation models in the accounting and finance literatures (e.g., Ohlson, 1995) that emphasize the role of future earnings in predicting stock price movements. Our results also suggest that imperfectly efficient markets reward information gatherers, such as security analysts, for their costly activities in generating superior earnings forecasts.

Subfields: Accounting, Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/e48d4b444126b34ebae17ce6de0fa670dcdfcfab

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Citations in the corpus

Access to Management and the Informativeness of Analyst Research (2014, background): “We also include Past forecast accuracy because Loh and Mian (2006) show that analysts who possess more accurate earnings forecasts also issue more profitable recommendations.”
Inside the 'Black Box' of Sell-Side Financial Analysts (2014, positive): “This motivation is consistent with Ertimur et al. (2007) and Loh and Mian (2006) who find that forecast accuracy is 16 positively related to recommendation profitability.”
On the Information Role of Stock Recommendation Revisions (2009, background): “…reflect a behavioral underreaction to information released by analysts’ revisions (Jegadeesh et al., 2004; Barber et al., 2001).5 In agreement, studies use those returns to proxy for analyst information value (Mikhail et al., 2004; Loh and Mian, 2006; Barber et al., 2007; Fang and Yasuda, 2008).”
The Financial Analyst Forecasting Literature: A Taxonomy with Suggestions for Further Research (2008, neutral): “Loh and Mian (2006) Archival, I/B/E/S, 1994-2000.”
Ratings Changes, Ratings Levels, and the Predictive Value of Analysts’ Recommendations (2010, positive): “6 A similar conclusion is reached by Loh and Mian (2006).”
Analyst Career Concerns, Effort Allocation, and Firms’ Information Environment (2018, neutral): “form the basis of the selection of “All-Star” analysts and the allocation of buy-side investors’ trades and commissions across brokerage firms (Maber, Groysberg, and Healy (2014) and Ljungqvist et al. (2007)).”
The Impact of Corporate Social Responsibility on Investment Recommendations: Analysts’ Perceptions and Shifting Institutional Logics (2015, background): “…long-term forecast error of the investment analysts that follow the focal firm and which captures the mean analyst ability in terms of how accurately they can predict a firm’s long-term performance (e.g. Mikhail, Walther, & Willis, 1997; Hong et al., 2000; Clement & Tse, 2005; Loh & Mian, 2006).”
Are analysts’ earnings forecasts more accurate when accompanied by cash flow forecasts? (2009, background): “Hence, investors can benefit from more accurate earnings forecasts in their investment decisions (Loh and Mian 2006), and a simple heuristic to identify analyst forecasts that are more accurate (such as whether the analyst issues a cash flow forecast) can greatly reduce investors’ information…”
Within-Firm Pay Inequality (2017, methodology): “Lastly, we require that a company be followed by at least five analysts to ensure that consensus forecasts constitute reliable proxies of market expectations (e.g., Easterwood and Nutt (1999), Loha and Mianc (2006)).”
Do Security Analysts Speak in Two Tongues (2009, background): “Two exceptions are Ertimur, Sunder, and Sunder (2007) and Loh and Mian (2006). Both show that analysts who issue more accurate forecasts also issue more profitable recommendations, supporting our hypothesis that genuinely optimistic analysts will reveal optimism in both forecasts and recommendations”
THE IMPACT OF CORPORATE SOCIAL RESPONSIBILITY ON INVESTMENT RECOMMENDATIONS. (2010, background): “…long-term forecast error of the investment analysts that follow the focal firm and which captures the mean analyst ability in terms of how accurately they can predict a firm’s long-term performance (e.g. Mikhail, Walther, & Willis, 1997; Hong et al., 2000; Clement & Tse, 2005; Loh & Mian, 2006).”