Analyst Earnings Forecast Revisions and the Pricing of Accruals

59 Pages Posted: 6 Feb 2003

See all articles by Mary E. Barth

Mary E. Barth

Stanford University - Graduate School of Business

Amy P. Hutton

Boston College - Carroll School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: February 2003

Abstract

We investigate the relation between two market anomalies to provide insights into analysts' role as information intermediaries. Prior research finds that accruals and analyst earnings forecast revisions predict future returns. We find that the accrual and forecast revision strategies generate returns of 15.5% and 5.5% when implemented independently. Strikingly, a combined strategy that uses forecast revisions to refine the accrual strategy generates a return of 28.5%. Firms with consistent accrual and forecast revision signals have less persistent accruals and earnings. We also find that accruals can be used to refine the forecast revision strategy - high accruals are associated with overoptimism in analyst forecasts. Our findings indicate that although forecast revisions reflect information about accrual and earnings persistence beyond that reflected in the level of current year accruals, investors do not fully incorporate this information into their valuation assessments.

Keywords: analysts, accruals, financial intermediation, mispricing anomalies

JEL Classification: G14, G20, M41

Suggested Citation

Barth, Mary E. and Hutton, Amy P., Analyst Earnings Forecast Revisions and the Pricing of Accruals (February 2003). Available at SSRN: https://ssrn.com/abstract=376841 or http://dx.doi.org/10.2139/ssrn.376841

Mary E. Barth

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-9040 (Phone)
650-725-0468 (Fax)

Amy P. Hutton (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617 552 1951 (Phone)

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