Sources of Earnings Variability and Their Effect on Earnings Forecasts
Accounting and Finance, Wiley-Blackwell, 2012
43 Pages Posted: 28 Oct 2011 Last revised: 22 Apr 2017
Date Written: July 27, 2011
Abstract
Previous research shows that analysts’ forecasts of earnings do not fully incorporate information contained in reported earnings variability. This study investigates whether the inefficient forecasting is due to a failure to incorporate observable information on two components of earnings variability, namely, variability in operating performance and income smoothing. Our portfolio results show that analysts’ forecasts fully incorporate information contained in earnings variability for firms with high income smoothing, and for firm with low variability in operating performance. Analysts also appear to recognize the permanence of earnings associated with firms with low variability in operating performance, and use this information to correct for past forecast errors.
Keywords: Income smoothing, variability in operating performance, analysts’ forecast, forecast errors, rational expectations, earnings volatility
JEL Classification: M40, M41
Suggested Citation: Suggested Citation
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