By Sebastian Gell
Earnings forecasts are ubiquitous in today’s monetary markets. they're crucial signs of destiny company functionality and a kick off point for enterprise valuation. tremendous misguided and overoptimistic forecasts in the course of the most up-to-date monetary difficulty have raised critical doubts concerning the reliability of such forecasts. This thesis accordingly investigates new determinants of forecast blunders and accuracy. furthermore, new determinants of forecast revisions are tested. extra particularly, the thesis solutions the subsequent questions: 1) How do analyst incentives bring about forecast mistakes? 2) How do alterations in analyst incentives result in forecast revisions?, and three) What components force variations in forecast accuracy?
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Extra resources for Determinants of Earnings Forecast Error, Earnings Forecast Revision and Earnings Forecast Accuracy
Instead, I focus on modeling revisions as a consequence of changes in analyst incentives to bias the earnings forecast. I use forecast error models for the initial and final error to model analyst iocentives. The cbange io analyst iocentives is then the difference between the two forecast error models. Thereby, I unify the forecast error and revision literature. To my knowledge, no other model is as comprehensive as the model I derive that aims at explaining the cross-sectional variation in earnings forecast revisions.
Fifth, the skewed earnings distribution bias explanation asserts that systematic bias may also arise in case of skewed earnings, even though an analyst is truthful, unselective and rational. For example, analysts can choose whether to forecast the mean or median of an earnings distribution. However, forecasting mean or median leads to different underlying loss functions regarding the forecast error. If an analyst chooses to forecast the median, the underlying loss function of the analyst is linear.
Investors therefore demand an objective, unbiased and accurate reflection of a fmn's future prospects. Moreover, sellside analysts conduct research on behalf of the eruploying brokerage house or investment bank that in tum could maintain further business relationships with the forecasted fmn. However, the forecasted fmn itself as well as the employing brokerage house or investment bank are less interested in objective, unbiased and accurate research and rather prefer research outputs in line with other objectives.