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Review of Quantitative Finance and Accounting

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01.08.2008 | Original Research

An empirical assessment of the premium associated with meeting or beating both time-series earnings expectations and analysts’ forecasts

verfasst von: Nicholas Dopuch, Chandra Seethamraju, Weihong Xu

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 2/2008

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Abstract

Recent research provides evidence of a market premium accruing to firms that meet or beat analysts’ forecasts. We find similar results for our sample of firms. However, we also find a market premium for firms that meet or beat time-series forecasts, and that the highest market premium accrued to firms that meet or beat both analysts’ and time-series forecasts. These findings are supported by assessments of future financial performance over the next two subsequent years. Our findings are consistent with the notion that when time-series benchmark is used in conjunction with analysts’ forecasts, investors obtain a more reliable (i.e., less noisy) signal regarding whether firms have actually met or beaten market expectations.

Vorheriger Artikel Board size and firm performance: the moderating effects of the market for corporate control

Nächster Artikel Firm valuation, abnormal earnings, and mutual funds flow

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Prior literature has shown that the Brown and Rozeff (1979) model is a more accurate time-series model than the Foster (1977) model. However, as indicated by Bernard and Thomas (1990), the iterative techniques necessary to estimate the Brown-Rozeff model require long time-series (e.g., 36 observations). The Foster model requires only 16–24 quarters of data, hence being less restrictive. We use the Foster (1977) model to increase our sample size. We replicate all our tests regarding the premium to meeting or beating forecasts using the Brown and Rozeff model and our results are similar.

The earnings expectation from the Foster (1977) model is E(Q_t) = Q_t−4 + φ(Q_t−1−Q_t−5) + δ, where Q_t is earnings in quarter t, φ is an autoregressive parameter and δ is a drift term. The Foster model assumes that earnings follow a first-order autoregressive process in seasonal differences.

One percent of extreme observations for AREV, ASURP and TSURP are deleted to mitigate the influence of potential outliers.

Bartov et al. (2002) use the variable AERROR instead of AREV in their regressions, but they show that both regressions are equivalent. We use the AREV form of the test, because AERROR in our sample is highly positively correlated with ASURP.

Bartov et al. (2002) include in their regressions ABEAT to capture the effect of beating expectations and AMBE*ASURP to capture the extent to which the premium to meeting analysts’ forecasts differs from the penalty for not meeting forecasts. We do not include ABEAT in our regressions because we are not interested in testing whether there exists a differential premium for meeting versus beating. We do not include AMBE*ASURP because it is highly correlated with ASURP.

Note that Bartov et al.’s (2002) sample covers more small firms and is in earlier period (1983–1997). Our estimate, however, is more in line with Burgstahler et al. (2002).

This equation is estimated without an intercept. Otherwise, it will not be of full rank.

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Titel: An empirical assessment of the premium associated with meeting or beating both time-series earnings expectations and analysts’ forecasts
verfasst von: Nicholas Dopuch
Chandra Seethamraju
Weihong Xu
Publikationsdatum: 01.08.2008
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 2/2008
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-007-0075-2

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