Sources of Earnings Variability and Their Effect on Earnings Forecasts

Accounting and Finance, Wiley-Blackwell, 2012

43 Pages Posted: 28 Oct 2011 Last revised: 22 Apr 2017

See all articles by Hwee Cheng Tan

Hwee Cheng Tan

University of New South Wales (UNSW)

Baljit K. Sidhu

UNSW Australia Business School, School of Accounting

Date Written: July 27, 2011

Abstract

Previous research shows that analysts’ forecasts of earnings do not fully incorporate information contained in reported earnings variability. This study investigates whether the inefficient forecasting is due to a failure to incorporate observable information on two components of earnings variability, namely, variability in operating performance and income smoothing. Our portfolio results show that analysts’ forecasts fully incorporate information contained in earnings variability for firms with high income smoothing, and for firm with low variability in operating performance. Analysts also appear to recognize the permanence of earnings associated with firms with low variability in operating performance, and use this information to correct for past forecast errors.

Keywords: Income smoothing, variability in operating performance, analysts’ forecast, forecast errors, rational expectations, earnings volatility

JEL Classification: M40, M41

Suggested Citation

Tan, Hwee Cheng and Sidhu, Baljit K., Sources of Earnings Variability and Their Effect on Earnings Forecasts (July 27, 2011). Accounting and Finance, Wiley-Blackwell, 2012, Available at SSRN: https://ssrn.com/abstract=1950469

Hwee Cheng Tan (Contact Author)

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

Baljit K. Sidhu

UNSW Australia Business School, School of Accounting ( email )

Sydney, NSW 2052
Australia

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