Review of Accounting Studies

, Volume 16, Issue 1, pp 89–115

Can financial statement analysis beat consensus analysts’ recommendations?

Article

DOI: 10.1007/s11142-010-9124-5

Cite this article as:
Wahlen, J.M. & Wieland, M.M. Rev Account Stud (2011) 16: 89. doi:10.1007/s11142-010-9124-5

Abstract

We examine whether investors can exploit financial statement information to identify companies with a greater likelihood of future earnings increases and whether stocks of those companies generate 1-year abnormal returns that exceed the abnormal returns from following analysts’ consensus recommendations. Our approach summarizes financial statement information into a “predicted earnings increase score,” which captures the likelihood of 1-year-ahead earnings increases. We find that, within our sample of consensus recommendations, stocks with high scores are much more likely to experience future earnings increases than stocks with low scores. A hedge portfolio strategy that utilizes our approach within each consensus recommendation level generates average annual abnormal returns of 10.9 percent over our 12-year sample period, after controlling for previously identified risk factors. These abnormal returns exceed those available from following analysts’ consensus recommendations. Our results show that share prices and consensus recommendations fail to impound financial statement information that helps predict future earnings changes.

Keywords

Earnings predictionsFinancial statement analysisConsensus recommendationsAbnormal returnsSell side analysts

JEL Classification

G10G11G14G17M41

Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.Kelley School of BusinessIndiana UniversityBloomingtonUSA
  2. 2.J. M. Tull School of Accounting, Terry College of BusinessUniversity of GeorgiaAthensUSA