Advertisement

Review of Quantitative Finance and Accounting

, Volume 51, Issue 2, pp 389–431 | Cite as

Determinants of analysts’ revenue forecast accuracy

  • Tanja Lorenz
  • Carsten Homburg
Original Research
  • 146 Downloads

Abstract

This study investigates financial analysts’ revenue forecasts and identifies determinants of the forecasts’ accuracy. We find that revenue forecast accuracy is determined by forecast and analyst characteristics similar to those of earnings forecast accuracy—namely, forecast horizon, days elapsed since the last forecast, analysts’ forecasting experience, forecast frequency, forecast portfolio, reputation, earnings forecast issuance, forecast boldness, and analysts’ prior performance in forecasting revenues and earnings. We develop a model that predicts the usefulness of revenue forecasts. Thereby, our study helps to ex ante identify more accurate revenue forecasts. Furthermore, we find that analysts concern themselves with their revenue forecasting performance. Analysts with poor revenue forecasting performance are more likely to stop forecasting revenues than analysts with better performance. Their decision is reasonable because revenue forecast accuracy affects analysts’ career prospects in terms of being promoted or terminated. Our study helps investors and academic researchers to understand determinants of revenue forecasts. This understanding is also beneficial for evaluating earnings forecasts because revenue forecasts reveal whether changes in earnings forecasts are due to anticipated changes in revenues or expenses.

Keywords

Financial analysts Revenue forecasts Earnings forecasts Forecast accuracy Disaggregated forecasts 

JEL Classification

G24 G29 M41 

References

  1. Baginski S, Hassell J, Kimbrough M (2004) Why do managers explain their earnings forecasts? J Acc Res 42(1):1–29. doi: 10.1111/j.1475-679x.2004.00127.x CrossRefGoogle Scholar
  2. Bilinski P (2014) Do analysts disclose cash flow forecasts with earnings estimates when earnings quality is low? J Bus Financ Acc 41(3–4):401–434. doi: 10.1111/jbfa.12056 CrossRefGoogle Scholar
  3. Bradshaw MT (2011) Analysts’ forecasts: what do we know after decades of work? Working paper. Boston College. doi: 10.2139/ssrn.1880339
  4. Brown LD (2001) How important is past analyst forecast accuracy? Financ Anal J 57(6):44–49. doi: 10.2469/faj.v57.n6.2492 CrossRefGoogle Scholar
  5. Brown LD, Mohammad E (2010) Is analyst earnings forecast ability only firm specific? Contemp Acc Res 27(3):727–750. doi: 10.1111/j.1911-3846.2010.01025.x CrossRefGoogle Scholar
  6. Brown LD, Mohd E (2003) The predictive value of analyst characteristics. J Acc Audit Financ 18(4):625–647. doi: 10.1177/0148558X0301800412 Google Scholar
  7. Call AC, Chen S, Tong YH (2009) Are analysts’ earnings forecasts more accurate when accompanied by cash flow forecasts? Rev Acc Stud 14(2):358–391. doi: 10.1007/s11142-009-9086-7 CrossRefGoogle Scholar
  8. Call AC, Chen S, Tong YH (2013) Are analysts’ cash flow forecasts naïve extensions of their own earnings forecasts? Contemp Acc Res 30(2):438–465. doi: 10.1111/j.1911-3846.2012.01184.x CrossRefGoogle Scholar
  9. Carter R, Manaster S (1990) Initial public offerings and underwriter reputation. J Financ 45(4):1045–1067. doi: 10.1111/j.1540-6261.1990.tb02426.x CrossRefGoogle Scholar
  10. Carter R, Dark FH, Singh AK (1998) Underwriter reputation, initial returns, and the long-run performance of IPO stocks. J Financ 53(1):285–311. doi: 10.1111/0022-1082.104624 CrossRefGoogle Scholar
  11. Clement MB (1999) Analyst forecast accuracy: do ability, resources, and portfolio complexity matter? J Acc Econ 27(3):285–303. doi: 10.1016/S0165-4101(99)00013-0 CrossRefGoogle Scholar
  12. Clement MB, Tse SY (2003) Do investors respond to analysts’ forecast revisions as if forecast accuracy is all that matters? Acc Rev 78(1):227–249. doi: 10.2308/accr.2003.78.1.227 CrossRefGoogle Scholar
  13. Clement MB, Tse SY (2005) Financial analyst characteristics and herding behavior in forecasting. J Financ 60(1):307–341. doi: 10.1111/j.1540-6261.2005.00731.x CrossRefGoogle Scholar
  14. Clement MB, Koonce L, Lopez TJ (2007) The roles of task-specific forecasting experience and innate ability in understanding analyst forecasting performance. J Acc Econ 44(3):378–398. doi: 10.1016/j.jacceco.2007.04.002 CrossRefGoogle Scholar
  15. Curtis AB, Lundholm RJ, McVay SE (2014) Forecasting sales: a model and some evidence from the retail industry. Contemp Acc Res 31(2):581–608. doi: 10.1111/1911-3846.12040 CrossRefGoogle Scholar
  16. Edmonds CT, Leece RD, Maher RD (2013) CEO bonuses compensation: the effects of missing analysts’ revenue forecasts. Rev Quant Financ Acc 41:149–170. doi: 10.1007/s11156-012-0305-0 CrossRefGoogle Scholar
  17. Elgers PT, Lo MH, Xie W, Xu LE (2016) A contextual evaluation of composite forecasts of annual earnings. Rev Pac Basin Financ Mark Polic 19(3):1–40. doi: 10.1142/S0219091516500144 Google Scholar
  18. Ertimur Y, Livnat J, Martikainen M (2003) Differential market reactions to revenue and expense surprises. Rev Acc Stud 8(2–3):185–211CrossRefGoogle Scholar
  19. Ertimur Y, Mayew WJ, Stubben SR (2011) Analyst reputation and the issuance of disaggregated earnings forecasts to I/B/E/S. Rev Acc Stud 16(1):29–58. doi: 10.1007/s11142-009-9116-5 CrossRefGoogle Scholar
  20. Givoly D, Hayn C, Lehavy R (2009) The quality of analysts’ cash flow forecasts. Acc Rev 84(6):1877–1911. doi: 10.2308/accr.2009.84.6.1877 CrossRefGoogle Scholar
  21. Gleason CA, Lee CMC (2003) Analyst forecast revisions and market price discovery. Acc Rev 78(1):193–225. doi: 10.2308/accr.2003.78.1.193 CrossRefGoogle Scholar
  22. Hirst DE, Koonce L, Venkataraman S (2007) How disaggregation enhances the credibility of management earnings forecasts. J Acc Res 45(4):811–837. doi: 10.1111/j.1475-679x.2007.00252.x CrossRefGoogle Scholar
  23. Hong H, Kubik JD (2003) Analyzing the analysts: career concerns and biased earnings forecasts. J Financ 58(1):313–351. doi: 10.1111/1540-6261.00526 CrossRefGoogle Scholar
  24. Hong H, Kubik JD, Solomon A (2000) Security analysts’ career concerns and herding of earnings forecasts. RAND J Econ 31(1):121–144. doi: 10.2307/2601032 CrossRefGoogle Scholar
  25. Hsu D, Chiao CH (2011) Relative accuracy of analysts’ earnings forecasts over time: a Markov chain analysis. Rev Quant Financ Acc 37:477–507. doi: 10.1007/s11156-010-0214-z CrossRefGoogle Scholar
  26. Hutton A, Miller G, Skinner D (2003) The role of supplementary statements with management earnings forecasts. J Acc Res 41(5):867–890. doi: 10.1046/j.1475-679x.2003.00126.x CrossRefGoogle Scholar
  27. Jackson AR (2005) Trade generation, reputation and sell-side analysts. J Financ 60(2):673–717. doi: 10.1111/j.1540-6261.2005.00743.x CrossRefGoogle Scholar
  28. Jacob J, Lys TZ, Neale MA (1999) Expertise in forecasting performance of security analysts. J Acc Econ 28(1):51–82. doi: 10.1016/S0165-4101(99)00016-6 CrossRefGoogle Scholar
  29. Ke B, Yu Y (2006) The effect of issuing biased earnings forecasts on analysts’ access to management and survival. J Acc Res 44(5):965–999. doi: 10.1111/j.1475-679X.2006.00221.x CrossRefGoogle Scholar
  30. Keung EC (2010) Do supplementary sales forecasts increase the credibility of financial analysts’ earnings forecasts? Acc Rev 85(6):2047–2074. doi: 10.2308/accr.2010.85.6.2047 CrossRefGoogle Scholar
  31. Lehavy R (2009) Discussion of “Are earnings forecasts more accurate when accompanied by cash flow forecasts?”. Rev Acc Stud 14(2–3):392–400. doi: 10.1007/s11142-009-9090-y CrossRefGoogle Scholar
  32. Loughran T, Ritter J (2004) Why has IPO underpricing changed over time? Financ Manag 33(3):5–37Google Scholar
  33. Marks J (2008) Revenue forecasts as a mechanism for analyst reputation development. Working paper. Seton Hall University. doi:  10.2139/ssrn.1095248
  34. Mest DP, Plummer E (2003) Analysts’ rationality and forecast bias: evidence from sales forecasts. Rev Quant Financ Acc 21:103–122. doi: 10.1023/A:1024841531461 CrossRefGoogle Scholar
  35. Mikhail MB, Walther BR, Willis RH (1997) Do security analysts improve their performance with experience? J Acc Res 35:131–157. doi: 10.2307/2491458 CrossRefGoogle Scholar
  36. O’Brien PC (1988) Analysts’ forecasts as earnings expectations. J Acc Econ 10(1):53–83. doi: 10.1016/0165-4101(88)90023-7 CrossRefGoogle Scholar
  37. Pae J, Yoon SS (2012) Determinants of analysts’ cash flow forecast accuracy. J Acc Audit Financ 27(1):123–144. doi: 10.1177/0148558x11409148 Google Scholar
  38. Penman SH (2013) Financial statement analysis and security valuation, 5th edn. McGraw-Hill, New YorkGoogle Scholar
  39. Rees L, Sivaramakrishnan K (2007) The effect of meeting or beating revenue forecasts on the association between quarterly returns and earnings forecast errors. Contemp Acc Res 24(1):259–290. doi: 10.1506/g767-1674-5686-5375 CrossRefGoogle Scholar
  40. Stickel SE (1992) Reputation and performance among security analysts. J Financ 47(5):1811–1836. doi: 10.1111/j.1540-6261.1992.tb04684.x CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2017

Authors and Affiliations

  1. 1.University of CologneCologneGermany

Personalised recommendations