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 July 23, 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 July 23, 2014).

Share This




More Science & Society News

Wednesday, July 23, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

Courts Conflicted Over Healthcare Law

Courts Conflicted Over Healthcare Law

AP (July 22, 2014) Two federal appeals courts issued conflicting rulings Tuesday on the legality of the federally-run healthcare exchange that operates in 36 states. (July 22) Video provided by AP
Powered by NewsLook.com
What Self-Made Women Need to Know Financially Before Getting Hitched

What Self-Made Women Need to Know Financially Before Getting Hitched

TheStreet (July 21, 2014) Halle Berry was recently ordered to pay her ex-boyfriend Gabriel Aubry $16,000 a month in child support by a California judge for their daughter Nahla. As women make strides in the workforce, they are increasingly left holding the bag when relationships end regardless of marital status. 'What Monied Women Need to Know Before Getting Married or Cohabitating' discusses information such as debt incurred during the marriage is both spouse's responsibility at divorce, whether after ten years of marriage spouses are entitled to half of everything and why property acquired within the marriage is fair game without a pre-nup. Video provided by TheStreet
Powered by NewsLook.com
$23.6 Billion Awarded To Widow In Smoking Lawsuit

$23.6 Billion Awarded To Widow In Smoking Lawsuit

Newsy (July 20, 2014) Cynthia Robinson claims R.J. Reynolds Tobacco Company hid the health and addiction risks of its products, leading to the death of her husband in 1996. Video provided by Newsy
Powered by NewsLook.com
Clock Ticks Down on Internet Speed Debate

Clock Ticks Down on Internet Speed Debate

Reuters - US Online Video (July 18, 2014) The FCC received more than 800,000 comments on whether and how internet speeds should be regulated, even crashing its system. Lily Jamali 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