Adaptive Expectations, Time-Series Models, and Analyst Forecast Revision

Brown, Lawrence D.; Rozeff, Michael S.

doi:10.2307/2490508

Cited by 41 publications

(20 citation statements)

References 5 publications

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“…First, stock prices appear to be both efticient with respect to the consensus of eamings forecasts, and accurate with respect to the eamings report (e.g., Gruber and Gultekin, 1981). Second, forecast errors appear to influence the formation of analyst forecasts in a manner which is consistent with adaptive expectations (e.g., Abdel-khalik and Espejo, 1978;Brown and Rozeff, 1979;Givoly;1985;and O'Brien, 1988). Together these findings are consistent with the implication that the periodic reporting of accounting income is influencing expectations and as a result stock prices, in a recursive manner.…”

Section: Proofsupporting

confidence: 71%

Ex post disclosure and the coordination of investors' adaptive expectations*

O'Brien

1990

Contemporary Accting Res

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Ahslracl. This paper provides a dynamic analysis of ex post public disclosure in a pnvately informed stock market economy. Investors cannot observe the underlying laws of motion of the economy, and this precludes them from immediately forming rational expectations. Instead, expectations are formed adaptively, and two positive roles are identified for public di.sclosure. First, it enables investors to recursively modify their forecast rules each period using their most recent forecast errors. Second, public disclosure via its recursive modification role imposes a common influence over the time path of each investor's expectations, and this can drive the economy as a whole towards attaining a noisy rational expectations equilibrium.Resume. L'auteur propose une analyse dynamique de la publication ex post dans un marche boursier disposant d'infonmations privilegiees. Les investisseurs ne peuvent observer les lois sous jacentes aux mouvements de I'economie. et il leur est done impossible de formuler immediatement leurs previsions rationnelles. Les previsions s'elaborent plutot dc fai^on adaptative, et deux roles positifs sont attribues a la publication. Premierement. elle permet aux investisseurs de proceder a I'ajustement recursif de leurs regies previsionnelles pour chaque periode, a partir de leur erreur previsionnelle la plus recente. Deuxiemement. la publication, grace a son role d'ajustement recursif. exerce une influence uniforme sur revolution temporelle des previsions de chaque investisseur. ce qui peut mener I'economie dans son ensemble vers un equilibre instable de previsions ralionnelles. IntroductionThe cotnpeting theories of how investors form expectations provide different insights Into the practice of periodic accounting reporting. At otie extreme, the ratiotial expectations hypothesis assumes that itivestors, wheti forming their expectations, know a priori the underlying laws of motion that govern the economy. Each itivestor's forecast rule is fomied using this knowledge, and a rational expectations equilibrium is attained. In the competing theory of adaptive expectation fomiation. investors are not assumed to know the underlying laws of motion. Then, the reporting of realized information may enable investors to

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Section: Proofsupporting

confidence: 71%

Ex post disclosure and the coordination of investors' adaptive expectations*

O'Brien

1990

Contemporary Accting Res

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“…That is, analysts raise (lower) their forecasts of future earnings when they discover that they underpredicted (overpredicted) the current year's earnings (Abdel-Khalik and Espejo, 1978;Brown and Roze, 1979;Givoly, 1985;Ali et al, 1992). 2 In these studies, the adaptive expectations model for ®nancial analysts' earnings forecasts is formulated as:…”

Section: Adaptive Expectationsmentioning

confidence: 99%

“…Prior evidence suggests that ®nancial analysts' earnings forecasts are formed in an adaptive fashion. That is, analysts revise their forecasts of future earnings to incorporate the portion of the most recent forecast error that they consider permanent (AbdelKhalik and Espejo, 1978;Brown and Roze, 1979;Givoly, 1985;Ali, Klein, and Rosenfeld, 1992). The permanent portion of an earnings forecast error re¯ects earnings that are likely to continue in future periods, while the temporary (or transitory) portion re¯ects earnings that are relevant only for the period in which they occur and have no implications for future periods.…”

Section: Introductionmentioning

confidence: 99%

Revisions in analysts' earnings forecasts: evidence of non-linear adaptive expectations

Mest¹,

Plummer²

2000

J. Forecast.

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“…For this reason, financial analysts' earnings forecasts can be considered superior to mechanical (time series) forecasts. Earlier work dealt only with the issue of accuracy or unbiasedness (for example, Abdel-khalik and Espejo, 1978;Brown and Rozeff, 1979;Imhoff and Pare, 1982;and Givoly, 1985), which is the weak condition for rational expectations.…”

Section: Why Examine Rationality?mentioning

confidence: 99%

Specification problems with information content of earnings: revisions and rationality of expectations and self‐selection bias*

Abdel-Khalik

1990

Contemporary Accting Res

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Abstract. This paper examines three possible specification problems with the research on information content of eamings disclosure. The first deals with the extent to which contemporaneous prediction errors are good surrogates for revisions of future eamings expectations and, hence, distributions of cash flows. This problem is elucidated by evaluating analysts' revisions of future eamings expectations as "relevant omitted variables." The results show that the quality of such surrogation is high in the first quarter but low in the second. The second problem concems the degree to which analysts' eamings forecasts are good surrogates for the market's own eamings expectations. Unbiasedness and orthogonality are the two properties examined. Although analysts' forecasts satisfy the unbiasedness property, the necessary condition of orthogonality is not satisfied. Hence, analysts' eamings forecasts are not Muthian rational expectations (i.e., they are not good surrogates for market forecasts). Consequently, the explanatory power of known empirical results is likely to be understated.The third specification issue is the significance of the self-selection bias resulting from endogenous partitioning of samples into, say, good-and bad-news portfolios. The Heckman-Lee method of correcting for this type of selection (truncation) bias is applied. The results show significant self-selection bias in both quarters but more so in the first than in the second quarter. Although applying the correction for this sample did not alter the general inferences, it did alter the marginal contribution of each explanatory variable and the explanatory power of the models.The results indicate that the infonnation news about quarterly eamings is not homogeneous across different quarters in a fiscal period. The possibility that a "quarter effect" exists needs further investigation. EDITOR s NOTE: An earlier draft of this paper and the discussions by Ray Ball (see pp. 178-184) and Judy Raybum (see pp. 173-177) Resume. L'auteur se penche sur trois probletnes de specificatioti possibles en ce qui a trait a la recherche sur le cotitetiu itiformatif des betiefices publies. Le pretnier de ces problemes porte sur ta mesure datis laquelle les erreurs previsionnelles actuelles sont des substituts efficaces aux ajustements des benefices eventuels prevus et, partant, aux distributions de flux monetaires. On elucide ce probleme grace a revaluation des ajustements des benefices eventuels prevus effectues par les analystes, a titre de « variables pertinentes omises ». Les resuitats de I'etude montrent que la qualite de cette substitution est eievee pour le premier trimestre mais faible pour le second. Le deuxieme probleme a trait a la mesure dans laquelle les previsions de benefices des analystes sont des substituts efficaces aux previsions de benefices au marche. L'auteur se demande si les previsions des analystes sont non biaisees et orthogonales. Bien qu'elles se revelent en effet non biaisees, elles ne respectent pas le critere d'orthogonalite. Les previs...

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Adaptive Expectations, Time-Series Models, and Analyst Forecast Revision

Cited by 41 publications

References 5 publications

Ex post disclosure and the coordination of investors' adaptive expectations*

Ex post disclosure and the coordination of investors' adaptive expectations*

Revisions in analysts' earnings forecasts: evidence of non-linear adaptive expectations

Specification problems with information content of earnings: revisions and rationality of expectations and self‐selection bias*

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