Sources of Earnings Variability and Their Effect on Earnings Forecasts

29 Pages Posted: 6 Oct 2012

See all articles by Hwee C. Tan

Hwee C. Tan

affiliation not provided to SSRN

Baljit K. Sidhu

UNSW Australia Business School, School of Accounting

Date Written: October 2012

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 forecast is because of a failure to incorporate observable information on two components of earnings variability: variability in operating performance and income smoothing. Our results show that analysts’ forecasts fully incorporate information contained in earnings variability for firms with high income smoothing and for firms with low operating variability. A smaller serial correlation of forecast errors is observed for firms with low operating variability, which suggests that analysts recognize the permanence in earnings for such firms.

Keywords: Analysts’ forecast, Earnings volatility, Forecast errors, Income smoothing, Variability in operating performance

JEL Classification: M40, M41

Suggested Citation

Tan, Hwee C. and Sidhu, Baljit K., Sources of Earnings Variability and Their Effect on Earnings Forecasts (October 2012). Accounting & Finance, Vol. 52, pp. 343-371, 2012, Available at SSRN: https://ssrn.com/abstract=2157869 or http://dx.doi.org/10.1111/j.1467-629X.2011.00444.x

Hwee C. Tan (Contact Author)

affiliation not provided to SSRN

No Address Available

Baljit K. Sidhu

UNSW Australia Business School, School of Accounting ( email )

Sydney, NSW 2052
Australia

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