Featured Research

from universities, journals, and other organizations

When punters punt: Stock analysts use instinct when forecasting firms they don't know, study suggests

Date:
September 11, 2012
Source:
University of Iowa
Summary:
When stock analysts aren’t sure how to assess the earnings of a hard to value firm, they often just predict those earnings will follow the general trend of the market, according to new research.

When stock analysts aren't sure how to assess the earnings of a hard to value firm, they often just predict those earnings will follow the general trend of the market, according to new research from the University of Iowa.

"If there's too much uncertainty and they don't have a lot of information to go with, analysts look at overall market sentiment to guide their forecasts," says Paul Hribar, professor of accounting in the UI Tippie College of Business.

Hribar said this bow to investor sentiment is a form of bias that often influences how analysts forecast the earnings of the firms they cover. Sentiment, Hribar says, is driven as much by emotion as by analysis and can reflect errors in investors' expectations about future payoffs, leading to mispriced stocks and a market that doesn't reflect underlying fundamentals.

Yet, Hribar's study appears to show that analysts' forecasts are heavily influenced by investor sentiment when firms don't have a lot of data to analyze.

Hribar and his study co-author, John McInnis of the University of Texas at Austin and a UI PhD alumnus, examined analysts' earnings per share forecasts and long-term earnings growth forecasts for every month from August 1983 to December 2006. From a final sample of more than 646,000 monthly observations, they looked at how accurate those forecasts were one year after they were published.

One thing they quickly found was that analysts are exceedingly optimistic, over-estimating actual earnings in every month in the sample period. In cases where analysts were optimistic, actual earnings did not measure up to forecast earnings. In those cases where analysts were pessimistic, they weren't pessimistic enough because the firms lost more money than the analysts predicted.

The study also found that some firms proved especially troublesome for analysts to forecast, particularly when it come to small firms, young firms, unprofitable firms, stocks with high volatility, and stocks with no dividends. In those cases, the analysts simply don't have enough data to make a sufficiently informed forecast, so they appear to apply existing sentiment to help generate their forecasts.

"When sentiment is high, earnings forecasts become more optimistic for those firms, and when sentiment is low, the forecasts follow suit," says Hribar. The pattern follows in both monthly forecasts and long-term quarterly and annual forecasts.

Hribar said the research took into account the fact that the firms could not be arbitraged as a way to explain the difference between forecast and actual earnings, but found that was not responsible. The researchers also considered the idea that forecasters were intentionally overstating earnings estimates to drive a bull market, but their analysis found that was not the case either, so that any over-optimism is unintentional.

Instead, he says the analysts seem to apply an subconscious bias and assume the stock will perform as well or as poorly as they expect the rest of the market to perform, reflecting investor sentiment.

"Analysts rarely say they don't know, but in a lot of these cases, it would be better for them to say they don't know," he says. The reason is because investors rely on these forecasts to make investment decisions, and if those decisions in the end are being made only on overall investor sentiment, then those stocks are mispriced and the market is not an accurate reflection of economic performance.

Hribar's and McInnis' paper, " Investor Sentiment and Analysts' Earnings Forecast Errors," was published recently in the journal Management Science.


Story Source:

The above story is based on materials provided by University of Iowa. The original article was written by Tom Snee. Note: Materials may be edited for content and length.


Journal Reference:

  1. Paul Hribar, John M. McInnis. Investor Sentiment and Analysts' Earnings Forecast Errors. Management Science, 2012; 58 (2): 293-307 [link]

Cite This Page:

University of Iowa. "When punters punt: Stock analysts use instinct when forecasting firms they don't know, study suggests." ScienceDaily. ScienceDaily, 11 September 2012. <www.sciencedaily.com/releases/2012/09/120911151827.htm>.
University of Iowa. (2012, September 11). When punters punt: Stock analysts use instinct when forecasting firms they don't know, study suggests. ScienceDaily. Retrieved August 1, 2014 from www.sciencedaily.com/releases/2012/09/120911151827.htm
University of Iowa. "When punters punt: Stock analysts use instinct when forecasting firms they don't know, study suggests." ScienceDaily. www.sciencedaily.com/releases/2012/09/120911151827.htm (accessed August 1, 2014).

Share This




More Science & Society News

Friday, August 1, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

House Republicans Vote to Sue Obama Over Healthcare Law

House Republicans Vote to Sue Obama Over Healthcare Law

Reuters - US Online Video (July 31, 2014) The Republican-led House of Representatives votes to sue President Obama, accusing him of overstepping his executive authority in making changes to the Affordable Care Act. Mana Rabiee reports. Video provided by Reuters
Powered by NewsLook.com
Florida Panther Rebound Upsets Ranchers

Florida Panther Rebound Upsets Ranchers

AP (July 31, 2014) With Florida's panther population rebounding, some ranchers complain the protected predators are once again killing their calves. (July 31) Video provided by AP
Powered by NewsLook.com
Britain Testing Driverless Cars on Roadways

Britain Testing Driverless Cars on Roadways

AP (July 30, 2014) British officials said on Wednesday that driverless cars will be tested on roads in as many as three cities in a trial program set to begin in January. Officials said the tests will last up to three years. (July 30) Video provided by AP
Powered by NewsLook.com
Health Insurers' Profits Slide

Health Insurers' Profits Slide

Reuters - Business Video Online (July 30, 2014) Obamacare-related costs were said to be behind the profit plunge at Wellpoint and Humana, but Wellpoint sees the new exchanges boosting its earnings for the full year. Fred Katayama reports. Video provided by Reuters
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:

Breaking News:
from the past week

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile: iPhone Android Web
Follow: Facebook Twitter Google+
Subscribe: RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins