Earnings Forecasting

Abstract

This article reviews analysts' forecasts of earnings, pointing out the incentives and constraints that impact on analysts' forecasting proficiency, the relatively poor performance of published analysts' forecasts, the difficulty experienced when we try and improve on forecasts, and the evidence which is apparently consistent with the ability of analysts' forecast to provide a basis for earning abnormal returns. The final point is controversial as it is surprising that investment practices based on publicly available information could be used to demonstrate market inefficiency – especially given the relatively inaccurate nature of those forecasts. The analysis is based on a vast literature that been generated by the ready availability of data on analysts' forecasts but it is also apparent that this large‐scale empirical analysis is providing relatively few insights which impact on practitioner behaviour. Whilst we have learned a lot from large‐scale empirical analysis it would be interesting to supplement this evidence with alternative approaches.