Chronic Bias in Earnings Forecasts

Posted: 3 May 2006

See all articles by Seung-Woog (Austin) Kwag

Seung-Woog (Austin) Kwag

Utah State University - Department of Business Administration

Ronald E. Shrieves

University of Tennessee, Knoxville - Department of Finance

Abstract

Whatever the source or explanation of bias in forecasts of company earnings, if such bias persists, it is potentially discoverable and exploitable by investors. This research addresses (1) whether characterizing forecasts as if they were a homogeneous group with respect to bias is accurate or useful and (2) whether a long-term record of forecast errors contains information useful in predicting subsequent errors. We found that earnings forecasts are heterogeneous with respect to direction and degree of bias. We also found evidence of extremes in optimism and pessimism and that extreme errors tend to persist in the same direction, which suggests certain potentially profitable trading strategies.

Keywords: Equity Investments, Fundamental Analysis and Valuation Models, Research Sources

Suggested Citation

Kwag, Seung-Woog and Shrieves, Ronald E., Chronic Bias in Earnings Forecasts. Financial Analysts Journal, Vol. 62, No. 1, pp. 81-96, January/February 2006, Available at SSRN: https://ssrn.com/abstract=898649

Seung-Woog Kwag (Contact Author)

Utah State University - Department of Business Administration ( email )

3510 Old Main Hill
Logan, UT 84322
United States
435-797-2361 (Phone)
435-797-2634 (Fax)

Ronald E. Shrieves

University of Tennessee, Knoxville - Department of Finance ( email )

Knoxville, TN 37996
United States

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